Question

Two sector economy consists of :

• A. Firms, Government
• B. Households, Firms
• C. Firms, Foreign sector
• D. Households, Government

Hint:

Remember the economic models: Two-sector economy → Households and Firms. Three-sector economy → Households, Firms, Government. Four-sector economy → Households, Firms, Government, Foreign sector.

Answer 1

The Correct Option is B

Step 1: Understanding a two sector economy.
A two sector economy is the simplest model used in economics to explain the circular flow of income. It includes only two main participants in the economy and ignores the role of government and foreign trade.
Step 2: Components of the two sector model.
In this model, the two sectors are households and firms. Households provide factors of production such as labour, land, and capital to firms, and in return they receive wages, rent, interest, and profits as income.
Step 3: Analysis of the options.

• (A) Firms, Government: Incorrect. Government is included in a three-sector economy.
• (B) Households, Firms: Correct. These are the only two sectors considered in a two sector economic model.
• (C) Firms, Foreign sector: Incorrect. Foreign sector appears in a four-sector open economy.
• (D) Households, Government: Incorrect because firms must be present for production activities.

Step 4: Conclusion.
Therefore, a two sector economy consists of households and firms. Final Answer: Households, Firms.