Question

Which statement about the circular flow model is CORRECT?

Question options:

A) Businesses earn income from both the factor and product markets.


B) Households earn income from both the factor and product markets.


C) Households earn income from the factor market and businesses earn revenue from the product market.

Answer 1

The statement about the circular flow model that is correct is households earn income from the factor market and businesses earn revenue from the product market.

Answer 2

The correct answer is C.

At the factor market, productive factors (land, work or capital) are offered by households who get a retribution in exchange for them (rent, salary or interest respectively). Therefore these retributions conform the income obtained by households in the factor market.

At the products market, the goods and services produced by firms are traded. Hence, the profit earned in this markets is the revenue that firms obtain from the economical activity they perform.