The household sector: This is the consuming sector of the economy   every one belongs to the household sector since everyone must consume.The households also own the factors of production they sell to the business sector.

The business (firm) sector: This is the producing limit. It lives factors of production goods the household of production goods and services. It pays wages, rent, interest and the household for the lives of factor services or resources

Significance of the circular flow of income is used to illustrate the identities or similarities of the three approaches to measuring national income.

It indicates that the three methods will always yield identical or some results explained in the above diagram as follows

Firms acquired factors of production (indicated by arrows 3 in order to produce goods and services. In return firms pay for the factors of production indicated by arrow 4

Firms produce goods and services for sale to households (arrows 2) and households pay for the goods and services ( arrow 1)                             

Arrows 2 and 3 represent real flow of goods and services and factors of production

Arrows 1 and 4 represent the financial or monetary flow

Arrow 1 indicates that the income which firms get from the sac of goods and services spend on the same goods and services supplied can be called the national   output denoted by o the which equals to the household expenditure denoted by the letter E 

In order to product firms hire factor of production from the household   . The firms pay households wage , rent, interest, profits for these factors of production , which become factors income payment denoted by the letter Y hence output is equal to income i e o-Y

Finally if we assume households do not save out of their income i.e all income they receive is spend on consumption, then their expenditure is equal to their income i e E= Y

Since

O=E   0=Y and E= Y , it follows that 0= Y=E '