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: Provide factors of production (land, labor, capital) to firms and receive factor payments (rent, wages, interest, profit). 
- Firms: Produce goods and services and sell them to households in exchange for consumption expenditure. 
- Circular Flow: The income and expenditure cycle continues, creating a closed economy.