Question

Discuss briefly the concept of circular flow of income in a two-sector model.

Hint:

Use diagrams to visually represent the flow of goods, services, and money in a circular flow model.

Answer 1

- Households: Supply factors of production (land, labor, capital) to businesses and obtain factor payments (rent, wages, interest, profit).
- Firms: Create goods and services and offer them to households in return for consumer spending. 
- Circular Flow: The cycle of income and spending persists, establishing a self-contained economy.