The circular flow of products in an economy involves firms selling goods and services to households, who provide labor and resources in return. This exchange of products and resources forms a continuous cycle.
The relationship between the elements of the circular flow of products can be best illustrated by understanding that firms produce and sell goods and services to households in the product market, which is shown by arrow A. Households then pay for these goods and services, providing revenues to firms, as indicated by arrow B. To obtain the income to purchase goods and services, households supply labor and resources to firms in the factor market, represented by arrow C, and in return, firms pay for these resources through wages and other factor payments, shown by arrow D.
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