The circular-flow diagram has two loops to illustrate the flows of:

Question

Quizplus · Accepted Answer

The circular-flow diagram illustrates the flow of goods and services in the product market and the flow of money through the factor market. In other words, producers sell goods and services in exchange for money, which is then used to purchase factors of production (such as labor and raw materials) from households. Households, in turn, use the money they earn from selling their labor to purchase goods and services from producers. This creates a circular flow of dollars and goods/services between households and firms.

The Circular-Flow Diagram Has Two Loops to Illustrate the Flows