The circular flow of income is the model of the economy in which the major exchanges are represented as flows of money, goods and services etc. between economic agents. The flows of money and goods exchanged in a closed circuit correspond in value, but run in the opposite direction. The circular flow of income can be described in three types of economies. They are: 1. The Two-Sector Economy 2. The Three-Sector Economy 3. The Four-Sector Economy (Open Economy) 1. The Two-Sector Economy: This economy considers a simple prototype economy which does not have a government and does not trade with other countries. The only transactions in this economy are: a) Households b) Firms Functions of Household : i. Factors of production ii. ...