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A Primer on Macroeconomics by Thomas Beveridge

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The Circular Flow Diagram: Will it go Round in Circles?

We have two sectors in our economy—households and firms. We have assumed that there is no government sector and no foreign trade sector in our economy. The circular flow diagram given in Figure 3-2 shows all the transactions in Pippin, including sales of resources and sales of final goods.

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Figure 3-2. A simple circular flow diagram.

Resources—human resources, capital, natural resources, and enterprise—flow from households to firms, and households are rewarded for the use of the resources with income (Y). The income received as payment for the use of the resources must equal the value of ...

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