With an aid of a diagram, explain the circular flow of income.

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1.b) With an aid of a diagram, explain the circular flow of income.

• Explanation: The circular flow of income is an economic model illustrating how money, goods, and services move through an economy. In its simplest form (a two-sector model), it shows the interaction between households and firms.
  • Households provide factors of production (like labor, land, capital, and entrepreneurship) to firms.
  • In return, firms pay factor incomes (wages, rent, interest, and profit) to households.
  • Firms use these factors to produce goods and services.
  • Households then