Discuss the concept of concept of circular flow of national income and simple two sectors economic

There is a circular flow which can be shown in the given diagram:

To explain the above idea let us taken an economy. Where there are only two sectors:

(i) Households

(ii) Firms

Firms are required to produce goods. To produce them, they require services of the factors of production. Thus incomes of these factors arise in the course of production. The sales value of net production must equal the sum total of payments made by the firms to the factors of production in the form of wages, rents, interest and profits. These incomes in turn become the source of expenditure.

Thus income flows from firms to households in exchange for productive services while products flow in return when expenditure by the households takes place.