1. the circular fl ow model is a simplifi ed version of our economy. describe how this model works7/10/2023 Businesses provide individuals with income (in the form of compensation) in exchange for their labor. Alternatively, one can think of these transactions in terms of the monetary flows that occur. These activities are represented by the green lines in the diagram. In this simple economy, individuals provide the labor that enables businesses to produce goods and services. To better understand the economy and the NIPAs, consider a simple economy consisting solely of businesses and individuals, as reflected in the circular flow diagram (1) : Figure 3-1: The Circular Flow by The Bureau of Economic Analysis is licensed under Public Domain. The circular flow diagram pictures the economy as consisting of two groups - households and firms - that interact in two markets: the goods and services market in which firms sell and households buy and the labor market in which households sell labor to business firms or other employees.
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