Question

Discuss briefly, the circular flow of income in a two sector economy model. 

Answer 1

Households own factors of production and supply factor services to enterprises (producing units). Firms make factor payments in exchange for their factor services. Thus, factor payments flow from enterprises (producing units) to households.

Households pay enterprises (producing units) for the goods and services they receive. Thus, consumption expenditure (spending on goods and services) goes from households to businesses.