Circular Flow of National Income in A Two Sector Economy or Circular Flow Model
Circular Flow of National Income in A Two Sector Economy or Circular Flow Model
Circular Flow of National Income in A Two Sector Economy or Circular Flow Model
In this figure, it is shown that the economy consists of two sectors (1) households and business. In the upper top of this figure, the resources such as land, capital, labor and entrepreneurial ability flow from households to business firms as indicated by the arrow mark. In opposite direction to this, money flows from business firms to the households as factors payments such as rent, wages, interest and profit.
In the lower pipe line, money flows from households to firms as consumption expenditure made by the households on the goods and services produced by the firms. The flow of goods and services is in opposite direction from business firms to households. We, thus, find that money flows from business firms to households as factor payments and then it flows back from households to firms. Thus there is in fact a circular flow of income. This circular flow of money or income continues year after year. This Is how the economy functions.