Draw a well labelled diagram of two sector model of a circular flow of income including the financial sector.
Solution
Two sector model of a circular flow of income includes firms and households. Following diagram shows the circular flow of income in a two-sector model with the financial sector. Financial institutions such as banks, mutual funds, insurance companies etc. are collectively called the financial sector.
In the upper part, the resources such as land, capital etc. flow from households to business firms and in opposite direction to this, money flows from firms to households in the form of factor payments.
In the lower part, money flows from households to firms as consumption expenditure made by the households on the goods and services produced by the firms, while the flow of goods and services is in opposite direction from business firms to households.
