Circular Flow of National Income
Let us study with the help of Circular flow of income how flow of goods and services between household and firms are balanced by flow of factor payments made in exchange of them. Circular flow of income in two sector economy where there is no government, no capital market, no foreign sector. Households own all the factors of production, that is land, labor, capital. These factors of production are sold to the firms to produce goods and services through factor markets. Firms make use of these resources and provide goods and services to the household through product markets.However the exchange of goods and services and factors of production takes place with the help of the financial flows which moves in the reverse direction.As the households purchase goods and services from firms it is their consumption expenditure which in tern becomes income or profits for the firms. On the other hand when firms buy factors of production from the households they pay factor payments in the form of wages, rent, interest.
Read more about this topic: Factor Payments (economics)
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