Circular flow of income in two sector economy

The circular flow of income is a model that shows how money flows through an economy. It is a simplified representation of how goods, services, and money move between households and firms. In a two-sector economy, the model is relatively straightforward, with only households and firms involved. Here's a breakdown of how the circular flow of income works in a two-sector economy.

Households

Households are the consumers in the economy. They are the ones who buy goods and services from firms. They receive income in the form of wages, salaries, and profits from their investments. This income is spent on consumption goods and services.

Firms

Firms are the producers in the economy. They produce goods and services to sell to households. They receive revenue from the sale of these goods and services. They also pay wages, salaries, and profits to households for their labor and capital.

Circular flow

The circular flow of income in a two-sector economy can be summarized as follows:

- Firms produce goods and services and sell them to households.
- Households buy goods and services from firms using their income.
- Firms receive revenue from the sale of goods and services.
- Firms pay wages, salaries, and profits to households.
- The income received by households is spent on goods and services produced by firms.

In this way, money flows from households to firms and back again, creating a circular flow of income. The model assumes that there is no government intervention or international trade involved.

Conclusion

The circular flow of income is a useful tool for understanding how money flows through an economy. In a two-sector economy, the model is relatively simple, with only households and firms involved. The model shows how goods and services are produced and consumed, and how income flows between households and firms.

In a 2 sector economy their's a flow of money from firms to household and households render factor services in money flow.
their's a flow of goods and services from firms to household and households render factor services in real flow