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The basic circular flow model involves the Household Sector and Business Sector, with households providing resources and firms compensating for them. The value of resources in the circular flow model is equal to the value of goods and services produced, creating a balanced economic cycle.
The basic, two-sector circular flow of income model consists of the Household Sector and Business Sector. In this model, households provide factors of production to firms, and in return, firms compensate households for these resources. This circular flow contributes to both expenditure on consumption and generates income, forming the basis for savings, investment, and government spending.
In the circular flow model, the value of resources is equal to the value of goods and services. This means that the income generated from the production of goods and services is equivalent to the value of the resources utilized in their production, leading to a balanced circular flow of income within the economy.
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