Two-sector model

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The two-sector model is a simple economic image of a closed economy . It examines the relationships and dependencies between private households and companies. It enables abstract statements to be made about national income , consumption and investment, as well as production and employment. In contrast to more extensive models, the state and foreign countries play no role here.

The role of households and businesses

In this model, private households offer labor (companies) and demand goods (companies). In this model, companies offer goods (private households) and ask for labor (private households).

Statements of the model

The statements of the model are quite simple, but they also only want to explain the basic relationships between the two economic subjects and sectors. The following statements can be made roughly simplified:

National income

National income as aggregate economic demand in the two-sector model results from the sum of household expenditures (consumption C) plus corporate expenditures (investments I) ${\displaystyle Y^{n}}$

${\displaystyle Y^{n}\!\ =C+I}$

The result of this so-called usage calculation corresponds exactly to the result of the so-called production calculation, in which the national income is defined as the sum of all goods and services Y produced. In equilibrium ,

${\displaystyle Y^{n}\!\ =Y}$

Wages and prices

If the model is based on the law of supply and demand , the effects of market disruptions on wages, prices, production and employment can be described. Wages, as the price for the labor provided by households, therefore tend to rise when companies demand (= need) more of it (labor becomes more expensive). Wages tend to decrease when companies demand less of it (labor becomes cheaper). Prices for goods (and services) tend to rise when households demand (= need) more of them. Prices tend to decline when households demand less.

criticism

The model is extremely abstract and has only two variables that determine national income, namely households and companies. The state as an additional buyer and collector of taxes, as well as foreign countries that demand and offer goods, are not part of the model. In addition, factors such as interest rates, money supply and currencies do not play a role, since it is a purely real economic analysis. Nevertheless, it is able to represent the simplest basic features of the dependencies of the economic subjects households and companies.

literature

• Thomas Christiaans: Neoclassical Growth Theory: Representation, Criticism and Extension . Books on Demand, 2004. ISBN 3-8334-2242-4 , p. 215