The circular flow diagram is used to demonstrate how a given economic system functions through the interactions of households and firms.
What is a circular flow diagram?
The circular flow of income of the economy where major exchanges are represented as flows of money, goods, and services, etc. between economic agents.
According to the circular flow, the household sells labor in the factor market while the firm sells goods at the goods market. Also, the firm buys labor from the factor market and the cost of labor flows to the households as income.
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