Two sector Model of circular Flow of Income:- In two sector Model of circular flow of income, there are only two sectors – ‘House hold sector’ ( i.e. , families) and ‘Producer sector’ ( i.e. , firms) and it deals with circular flow (both money and real flows ) between these two sectors.
Assumptions :-
(1) The economy consists of two sectors:
(a) Household Sector :-This sector provides its services to producer sector and consume the goods and services finally produced by producer sector.
(b) Producer Sector :- It produces final goods and services and makes uses of the services of various factor like land, labour, capital, etc.
(2) Economic policies are not influenced by the government.
(3) Economy is ‘closed economy’ i.e. producer sector makes neither export nor imports and household sector is fully dependent on domestic production.
(4) Household sector spends its entire income and serves nothing.
Conclusions of the Model:
Two sector Circular flow Model concludes the following facts:
(1) Total goods and services produced by the producer sector equals the consumption of goods and services made by household sector.
(2) Factor payment made by firms equals the factor income received by household sector.
(3) Consumption expenditure of household sector equals the income of household sector.
(4) Real flow of production and consumption of firms and households is equal to the money flow of income and expenditure of firms and households.
