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CA Foundation · Business Economics · Determination of National Income

In the circular flow of income in a simple two-sector economy (households and firms), which of the following correctly describes the flow from firms to households?

Firms pay households factor incomes such as wages, rent, interest and profit in return for the factor services the households supply. Consumption spending flows the other way, from households to firms, so it is the real counterpart of the money flow, not the firm-to-household payment.

  1. AFactor payments such as wages, rent, interest and profit for the factor services suppliedCorrect
  2. BConsumption expenditure on goods and services produced by firms
  3. CSavings deposited by households in financial markets
  4. DTaxes paid to the government by households

Explanation

In the two-sector model, households supply factor services to firms and receive factor payments (wages, rent, interest, profit) in return. Consumption expenditure flows in the opposite direction, from households to firms. Savings and taxes are not direct flows from firms to households in this basic model.

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