Macroeconomics sees an economy as a combination of four sectors. The simple economy used to explain the circular flow of income in national income accounting has:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → households and firms only
Macroeconomics sees four sectors: households, firms, government and the external sector. The simple economy of the circular flow has no government and no external trade, so it has only households and firms.
Option (1) households and firms only — Correct. Income goes round the two sectors, firms and households.
Option (2) households, firms and government only — Incorrect. The simple economy is without a government.
Option (3) firms, government and the external sector only — Incorrect. It has no government and no external trade; households are in it.
Option (4) all four sectors — Incorrect. Only two of the four sectors are in the simple economy.
This question uses Introduction to Macroeconomics and National Income Accounting together.
NCERT (2026-27): “2.2 Circular Flow of Income and Methods of Calculating National Income … In the next period the firms will once again produce goods and services and pay remunerations to the factors of production. These remunerations will once again be used to buy the goods and services. Hence year after year we can imagine the aggregate income of the economy going through the two sectors, firms and households, in a circular way. …” “Chapter 1: Introduction – 1.2 Context of the Present Book of Macroeconomics: … Macroeconomics sees an economy as a combination of four sectors, namely households, firms, government and external sector.” |