CSEET · Economic and Business Environment · National Income Accounting and Related Concepts
Which statement about the circular flow of income in a simple two-sector economy of households and firms is correct?
In a two-sector circular flow, households supply factors of production to firms and receive factor incomes such as wages, rent, interest and profit. Firms supply goods and services and receive consumption spending. Taxes and subsidies belong to a model with government.
- AHouseholds provide factors of production and receive factor incomes from firmsCorrect
- BFirms pay taxes to households in return for goods
- CHouseholds receive subsidies from firms to buy goods
- DFirms receive factor incomes from households
Explanation
In the two-sector model, households supply land, labour, capital and enterprise to firms and receive rent, wages, interest and profit. Firms supply goods and services and receive consumption expenditure. There is no government, so taxes and subsidies do not appear.
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