Household and firm depend on each other in a circular flow model. Justify the statement in a two sector model?
Circular Flow of Income means the circularity of the flows of production, income and expenditure in any economy.
in 2 sector circular flow model, this model offers following observation:-
(i) Total production of goods and services by firms = Total consumption of goods and services by the household sector.
(ii) Factor payment by firms= Factor incomes of the household sector.
(iii) consumption expenditure of household sector = income of household sector
(iv) money flows are oppsite to real flows. thus, while factor services flow from households to the producers, factor payment flows from producers to the households.
hence.. they depend on each other in two sector model
in 2 sector circular flow model, this model offers following observation:-
(i) Total production of goods and services by firms = Total consumption of goods and services by the household sector.
(ii) Factor payment by firms= Factor incomes of the household sector.
(iii) consumption expenditure of household sector = income of household sector
(iv) money flows are oppsite to real flows. thus, while factor services flow from households to the producers, factor payment flows from producers to the households.
hence.. they depend on each other in two sector model