In middle school science classes across the country, students are introduced to the idea of systems and how matter flows through them. The water cycle is an example of one of these systems. Water evaporates from the land and the oceans, condenses in clouds, precipitates over the land, percolates through the ground, or runs off in streams and rivers back to the oceans where it again evaporates. What is the source of energy for the water cycle? The sun. The economy can be understood in a similar manner. In an economic system, energy is derived from people's self-interest manifested in markets and through the political process. The circular flow model shows the relationship between households, firms, governments, and the foreign sector as they all interact in product, factor, and financial markets.

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