Answer to Question #285912 in Macroeconomics for Sheikha

Question

1. Omer and Hanna are in an argument where Omer says that in a two sectoral economy the income of one sector is equal to the expenditures of the other sector, where else Hanna believes the otherwise. Using the two-sectoral diagram justify who in your opinion is right and why. (5 marks)

Answer 1

Household supplies factors of production such as land, capital entrepreneurial ability to the firms. The firms pay for the factors of production to the household in terms of wages, rent, interest, and profits. The household now uses the money received from the firms to purchase goods and services from the firms as consumption expenditure. Therefore, money flows from business firms as factor payments to the households and then to the firms as consumption expenditure.

Therefore from the diagram and explanation above, Hanna right as the circular starts with the expenditure of one sector for the other one to have income and not vice versa.