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Basic diagram of the circular flow of income. The functioning of the free-market economic system is represented with firms and households and interaction back and forth. The circular flow of income or circular flow is a model of the economy in which the major exchanges are represented as flows of money, goods and services, etc. between economic agents. The flows of money and goods exchanges in a closed circuit and correspond in value, but run in the opposite direction.
Explain how the circular flow diagram relates to the current economic situation. Using the circular flow diagram, explain a way that your family interacts in the factor market and a way that it interacts in the products market. The circular flow diagram relates to the current economic situation since it shows the ways our different markets affect each other. There are two markets, the Resource market and the Product market. âThis model provides an overview of the central concerns of both macroeconomics and microeconomics.