If households and firms were the only two sectors in economy

If households and firms were the only two sectors in economy, income and output would be equal...True or false

Solution

This statement is true only if there are two sectors (households and firms) in the economy.To carry out production, firms employ labour ,rent in capital,buy raw materials etc. Economy consists of households and firms.These factor incomes goes to households (for example in the form of wage ) which is their income.Then households spend all their income in purchasing output produced by firms.There is no saving.

There is no financial institution or bank in this two sector model.So households income is equal to their expenditure on goods which is equal to output produced.