Circular Flow of Income in a Simple, Two Sector, Closed Economy without Savings Closed economy means an economy which has not a single economic transaction with rest of the world. The term without savings means amount of money received by either households or firms is entirely spent by them, means the amount of saving is zero.
The two main Sector are Firms and Households in a two sector closed economy. The interdependency among them can be explained as follows :
(a) Household lend their Land, Labour, Capital and Entrepreneurship to firms for production process. Firms used them to produce different goods and service and sale their whole production to households for consumption. This flow is termed as real flow, because in this flow the circular flow of goods and factor services is occuring here.
(b) Firm made monetary payment to the households sector for providing factor services for production process like rent to landlord, interest to capitalist, wages to labourer, profit to entrepreneur. From this factor income the household sector made payments for the goods and service purchased from firms. This flow of money occur in the form of income and payment. Therefore this flow is termed as monetary flow.
