Answer to Question #181003 in Microeconomics for Thompho

Question

Develop and explain the traditional circular flow diagram and illustrate the interdependence between the sectors

Answer 1

Traditional circular flow diagram is a model that demonstrates how money moves from firms to households and back in unending loop in the economy. Both household are firms are sectors of the economy that rely on each other as shown in the diagram. Money moves from producers to workers in form of wage when they offer factors of production like labor. It then moves back to firms when households spend money on goods and services produced by the firms.