Question

How does the process work in a circular flow diagram when applying it to an economy?

Answer 1

• Well you have the main factor of production which is the Labor force (the people)
• The Labor force help businesses produce final goods and in return they receive an income
• After that the income they receive is spent on other goods and services
• After that the income they receive is spent on other goods and services
• The spending money goes back to the business to help them produce and give incomes
• That is the circular diagram when you look at a macro-level you will find that the aggregate production is the same as the aggregate consumption (spending of the people)