3 Questions
In a two-sector economy, which loop of the circular flow of income represents the flow of factor services from households to firms?
Outer loop
What flows from firms to households in the circular flow of income in a two-sector economy?
Goods and services
How is the entire amount of money paid by firms as factor payments returned to the firms in a two-sector economy?
As consumption expenditure by households
Study Notes
Circular Flow of Income in a Two-Sector Economy
- The loop that represents the flow of factor services from households to firms is the resource market loop.
- In the circular flow of income, firms pay households for factor services in the form of rent, wages, and interest.
- The flow from firms to households in the circular flow of income is the payment of rent, wages, and interest.
- The entire amount of money paid by firms as factor payments is returned to the firms when households spend their entire income on goods and services produced by the firms.
Discover the concept of the circular flow of income in a two-sector economy, which highlights the interconnection between households and firms through the exchange of goods, services, and factors. Understand the flow of factor services and payments, as well as the flow of goods, services, and consumption expenditure.
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