Question

Identify the correct statement in the context of Circular Flow of Income in a two-sector economy:

• A. Household receives factor services from firms
• B. Household invests while firm saves
• C. Firms produce goods and services
• D. Household supplies factor services to Government

Answer 1

The Correct Option is C

The Circular Flow of Income in a two-sector economy illustrates the financial exchanges between households and firms. Key components include:

• Households: Provide factor services (labor, land, capital) to firms, receiving income (wages, rent, profits) in compensation.
• Firms: Employ these factor services to produce goods and services. These products are then sold to households, generating income and expenditure flows.

Within this model, the most precise description of the Circular Flow of Income in a two-sector economy is:

• Firms engage in the production of goods and services

This statement accurately captures the fundamental role of firms as producers within the economic interactions of households and firms.