CIRCULAR FLOW

OF INCOME
TWO SECTOR ECONOMY MODEL
PRESENTED BY:
ARSLAN ASHRAF (S137)
 Economic Model which describes the
flow of income between Producers and
Consumers.
Circular
Flow  Producer is referred to as Firms.
 Consumer are referred to as Households.
 Exchanges are represented as Flows of
Money, Goods and Services.
Elements of Circular Flow
 Circular Flow Models

Two Sector Three Sector Four Sector Five Sector

Model Model Model Model
 Households
Demand goods and services
Provide labor resources to the
business sector.
Two Sector
Model
Firms
Produce and supply goods and
services
Demand resources for
production like, land, labor,
capital, and entrepreneurs.

5
Understanding
Two Sector Model

Businesses need various

resources.
Households make available
these resources
Businesses pay money to
households
These households are also
the customers of businesses
 Households do not save any
money.

Similarly, businesses do not retain

Assumptions any profits.
of Two Sector
Model No Government interference.

The economy in which the two

sectors operate is closed.
Drawbacks of Two Sector Model

It does not hold well in the real world.

Not sufficient for macro-level understanding.

Most of the assumptions (no savings, fixed rate of

interest, fixed wages, etc.) are unrealistic.
Thank you
ANY QUESTIONS ?