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Basic diagram of the circular flow of income. The functioning of the free-market economic system is represented with firms and households and interaction back and forth. The circular flow of income or circular flow is a model of the economy in which the major exchanges are represented as flows of money, goods and services, etc. between economic agents. The flows of money and goods exchanges in a closed circuit and correspond in value, but run in the opposite direction.
Circular Flow In a market economy, there are two markets: The factor market, and the product market. In the factor market, the people, who own the factors of production, sell their services to the companies that produce products. In exchange, the companies give the workers wages and, rent, and interest. In the factor market, the people are the sellers, and the companies are the buyers.