CSEET · Economic and Business Environment · National Income Accounting and Related Concepts
In a simple two-sector circular flow model consisting only of households and firms, with no saving, taxes or foreign trade, what do households receive from firms in return for supplying factors of production?
Households receive factor incomes such as wages, rent, interest and profit from firms. These are the monetary payments for the factor services households supply. Goods and services flow the other way, from firms to households, in exchange for consumption expenditure.
- AFactor incomes such as wages, rent, interest and profitCorrect
- BFinal goods and services
- CGovernment transfer payments
- DLoans for investment
Explanation
In the two-sector model, households sell factor services to firms and receive factor payments (wages, rent, interest, profit). Final goods and services flow in the opposite direction, from firms to households, so that option describes the real flow to households, not the payment received for factors.
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