1. Circular Flow Of Income Two Sector Model
Santosh Borkakati
Asst. Professor
Department of Economics
Mangaldai College

2. Economy divided into two sectors Economy
Two Sector Model
Economy divided into two sectors Economy
Household
or Consumption Sector
Production or
Business Sector

3. Production Sector Production sector produces goods and services.
The process of production is a continuous process. Factors of production such as land ,labor, capital & entrepreneurship are combined together for the production of goods & services.
Production sector supplies goods and services to household sector.

4. Household Sector
The supply of factors of production come from households. These factors offers their services to the producers who in returns produce goods &services & make payments as reward in the form of rent, wages, interest & profits.
The households spend this money on goods & services produced by producers. Thus income or money first flows production to the households in the form of factor payments & then from the households to the production in the form of consumption expenditure.
The income continue to flow in a circular way so it is called circular flow of income.

5. Two Sector Model Factor Services Payment for Factors Households
Producers
Households
Payment For Goods & Services
Factor Services
Payment for Factors
Goods and Services

6. Two Sector Model With Savings
Factor Services
Factor Payments
Borrowing
Capital
Market
Saving
Producers
Households
Borrowing
Saving
Payments for Goods and Services
Goods & Services

7. In the previous model ,it is assumed that household sector and firms do not save at all. But in actual practice it does not happen so. Households save some part of their income for various reasons like precautionary reasons, transactionary reasons &speculative reasons.
Similarly firms also save some of their receipts for reasons like-expansion of their business etc.
All the banking institutions, insurance companies & financial houses taken together constitute capital market of the economy.
From capital market these savings flow to firms as loans for investment.

8. Withdrawals & Injections
In reality, however, there are leakages from and additions to the circular flows of income and expenditure
The leakages and additions are also called withdrawals and injections, respectively.

9. Withdrawals
Withdrawal is the amount that is set aside by the households and the firms and is not spent on the domestically produced goods and services over the period of time . Example a household sets aside a part of income for old age or against the loss of job.
Saving is a withdrawal.
When savings are invested, they take a form of injections
Firms may also withhold a part of their total receipts and may not return it to the circular flows in the form of factor payments in anticipation of depression
Such withdrawals reduce the size of circular flows

10. Injections
Amount that is spent by households and firms in addition to their incomes generated within the regular economy
Injection by the household may be in the form of spending inherited savings or the hoarding
Firms can inject money by spending their retained earnings or borrowing from outside
Injections increase the size of circular flows

11. Thank You