Question

The circular flow model includes two circles. Those circles flow in opposite directions. What do those circles represent? Identify one real-world example for each of those flows.

Answer 1

The circular flow model depicts the flow of money and products in the economy between households and firms.It segregates market into two categories that is goods and services markets and factor market .There is a circular flow that flows in two directions in this model .Households provide various factors like labor , land and capital  to firms so as to produce essential goods and services for them and in return firms provide money to households in the form of wages for labour,rent for land ,etc as compensation to firms( opposite direction). So households provide factor services to the firms and in return firms provide factor payments to the households.For example, households provide capital to firms which buys various tools used by labor to convert barren land into goods in the form of various crops and in return firms provide interest as a factor payment against capital to households .