Two Sector Model Santosh Borkakati Asst Professor Department of Economics Mangaldai College Two Sector Model Economy divided into two sectors Economy Production or Business Sector Household ID: 1027859
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1. Circular Flow Of Income Two Sector ModelSantosh BorkakatiAsst. ProfessorDepartment of EconomicsMangaldai College
2. Two Sector ModelEconomy divided into two sectorsEconomyProduction or Business SectorHousehold or Consumption Sector
3. Production SectorProduction 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 SectorThe 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 ModelProducersHouseholdsPayment For Goods & Services Factor ServicesPayment for FactorsGoods and Services
6. Two Sector Model With SavingsProducersHouseholdsFactor PaymentsPayments for Goods and Services Goods & ServicesCapitalMarketBorrowingSavingBorrowingSavingFactor 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 & InjectionsIn reality, however, there are leakages from and additions to the circular flows of income and expenditureThe leakages and additions are also called withdrawals and injections, respectively.8
9. WithdrawalsWithdrawal 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 injectionsFirms 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 depressionSuch withdrawals reduce the size of circular flows 9
10. InjectionsAmount that is spent by households and firms in addition to their incomes generated within the regular economyInjection by the household may be in the form of spending inherited savings or the hoardingFirms can inject money by spending their retained earnings or borrowing from outsideInjections increase the size of circular flows 10
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