Which of the following are components of the circular flow model?

• A. Households and firms
• B. Government and international trade exclusively
• C. Only producers
• D. Only financial institutions

Answer: (A)

Verified step by step guidance

1. Understand that the circular flow model in microeconomics illustrates how money, goods, and services move through an economy between different sectors.
2. Identify the main components typically included in the basic circular flow model: households and firms. Households provide factors of production (like labor) to firms and receive income, while firms produce goods and services consumed by households.
3. Recognize that while government, international trade, and financial institutions can be included in more complex versions of the model, the fundamental components are households and firms.
4. Evaluate each option by comparing it to the basic circular flow model components: 'Households and firms' matches the core sectors, whereas the others focus on more specific or additional sectors.
5. Conclude that the correct answer is 'Households and firms' because they represent the essential participants in the circular flow of economic activity.