1. Household sector -
a. They are owner of all he factors of production
b. The total income received is in the form of Rent, Wages, Interest and Profit.
c. They are the consumer of goods & services.
2. Firm sector -
a. They hire factors of production from household sector.
b. They produce and sell goods & services to household sector and receive income from them.
c. They make factor payments to the household sectors.
The followings are true for these two sectors:
- Total production of goods and services by firms equal to total consumption of goods & services by households.
- Factor payments by the firm equal to factor income of household.
- consumption expenditure of household is equal to income of firm.
- Real flow of production and consumption of firms and households equal to money flow of income and expenditure of firms and households.
Circular flow in two sector economy
