First, it shows how businesses and households interact in the two markets—

the market for resources and the market for goods and services. Notice that
households and businesses are both buyers and sellers.
Households are sellers in the market for resources. Households sell land,
labor, capital, and entrepreneurial activity in exchange for money, which in
this case is called income.
Households are buyers in the market for goods and services. Households
exchange income for goods and services.
Businesses are sellers in the market for goods and services. Businesses sell
goods and services in exchange for money, which in this case is called
revenue.
Businesses are buyers in the markets for resources. Businesses exchange the
revenue earned in the market for goods and services to buy land, labor and
capital in the market for resources. In this case, the money spent is called the
cost of production.
Second, the model shows the flow of money in exchange for goods and
services and resources.
Money flows clockwise, while goods, services, and resources flow counter-
clockwise.
The circular flow model is a simple tool for learning about the economy. It
shows the relationship between households and businesses and how these
different decision-makers in the economy fit together.
Plus, it shows how money keeps economic resources and goods and services
moving around and around and around the economy.