Question

“In a two-sector economy, consumption expenditure by households is always equal to aggregate expenditure on goods and services produced by the firms.”
Do you agree with the given statement? Support your answer with valid explanation.

Hint:

In a two-sector model (closed economy without savings or government), income flows in a circular way — from households to firms and back again — ensuring equality between income and expenditure.

Answer 1

In a simplified two-sector economy (households and firms), the statement is accurate. Explanation:
Households supply production factors (land, labor, capital, and entrepreneurship) to firms.
Firms use these factors to produce goods and services, paying households with factor incomes (wages, rent, interest, profit).
Households spend all income on consumption; there's no saving, government, or foreign trade.
Firms receive income when households buy their goods and services.
Consequently, all household income is spent on consumption, and firm production aligns with household consumption. Therefore, at equilibrium: \[ \text{Aggregate Expenditure (AE)} = \text{Consumption Expenditure (C)} = \text{Value of Output} \]