The two-sector circular flow model is shown below. The domestic economy has two sectors which are producers or firms and households. The households provide labour, capital and entrepreneurship to firms and the firms make payments to household in return. The households spend income on consumer goods and services which are produced by the firms.
Money flows from firms to households as payments to factor inputs, and then money flows from households to firms. Therefore, there is a circular flow of money. When S=I in a two-sector model, the circular flow of income in the economy continues unabated. The withdrawal of money from the income stream by savings should be offset by the injection of money through investment expenditure. A constant money income flow in an economy is to be obtained when planned saving equals planned investment.
