Answer:
In a two sector economy, there are only two sectors of economic activity namely households and firms. Households supply factor services to firms and firms hire factor services from households. Households spend their entire income on consumption. Firms sell what is produced to the households. There are two types of markets in this economy: (i) Product Market Market for goods and services. (ii) Factor Market Market for factors of production. 
Circular Flow of Income in a Two Sector Economy The above figure shows that (i) Total Production of Goods and Services by firms = Total Consumption of Goods and Services by Households (ii) Factor Payments by Firms = Factor Incomes of Households (iii) Consumption Expenditure of Households = Income of Firms (iv) Thus, Real Flow of Production and Consumption of Firms and Households = Money Flows of Income and Expenditure of Firms and Households
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