Final answer:
The circular flow diagram is a visual model that displays the interactions between households and firms within the goods and services market and the labor market, highlighting the circular nature of economic activity.
Step-by-step explanation:
The circular flow diagram is a visual model of how the economy is organized. It illustrates the interactions between households and firms within the economy, specifically in the goods and services market and the labor market. In the goods and services market, firms sell products and households are the consumers that buy these products.
Conversely, in the labor market, households provide labor that firms utilize to produce goods and services. This constant back-and-forth flow of goods, services, and labor creates a circular pattern of economic activity that is essential to understanding basic economic principles.
A circular flow diagram is a visual model that views the economy as consisting of households and firms interacting in a goods and services market and a labor market. It shows the flow of money, resources, goods, and services between different sectors of the economy.