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1. Circular Flow of Income • Definition: A primary model explaining how income is generated, distributed, and redistributed among economic agents within a specific period.  • Two-Sector Model: Focuses on the interaction between two main agents: Households (consumers who own factor inputs) and Firms/Business Units (producers who harness those factors to create goods).  • The Flow: Households supply factors (like labor) to firms in exchange for income, which they then spend on goods and services