Balbharati solutions for Economics HSC 12th Standard Maharashtra State Board

Chapter 7. National Income

Q.5. Answer the following:

1. Explain the two-sector model of the circular flow of national income.

Answer: -

Two sector model of Circular flow of National Income:

There are two sectors, households and firms. It divides the diagram into two parts. The upper half represents the factor market and the lower half represents the commodity market. Fig. explains the circular flow of income and expenditure in a two-sector model.

Diagram

 

 

In the above figure the factors of production flow from the households to the firms.

The firms use these factors to produce goods and services required by households. 

Thus, goods flow from the households to the firms and from the firms back to the households. It is called product flows. 

In the same way, money flows from the firms to the households in the form of factor payments such as rent, wages, interest and profit. 

Households use this income to purchase goods and services. Thus, money flows from the firms to the households and from the households back to the firms. It is called money flows. 

In the circular flow of income, production generates factor income, which is converted into expenditure. 

This flow of income continues as production is a continuous activity due to never-ending human wants.