Macro Economics: BBS Second Year Note
Answer in Both English and Nepali Medium
Explain the Circular flow of income and expenditure in a two sector economy. 10
- Answer: Two sector economy is a simple economy which includes household and business sector.
- Government and foreign trade are not included.
- It is a fictional economy.
Assumptions of two sector closed economy:
a) Only household and business sector will be included.
b) Income will be spent on consumption.
c) The savings will be zero.
d) Government and international trade will not be included.
e) Household sector controls means of production.
The cyclical flow of income and expenditure in the two regional economies can be seen from the figure below.
In the upper part of the picture, the means of production originating from the household sector, land, labour, capital, and organisation seem to have flowed towards the business sector. It shows the flow of money received as income. This indicates that the service of resources and the flow of money are in opposite directions.
The bottom of the picture shows the commodity market. Where the goods and services flowing in the household sector have been shown to have originated from the commercial sector. The income earned by the business sector is received in currency. The picture shows that income and money flow are equal.