Question

The importance of the product market in the circular flow

Answer 1

Governments levy taxes on households and businesses in order to provide certain benefitsto everyone. In the circular flowmodel, injections into the economy include investment, government purchases, and exports while leakages include savings, taxes, and imports.

Answer 2

The economic activity of any market is based on its circular flow of goods and services. In a circular flow, the exchange of services or goods in the free markets are illustrated.

Just like all the economic models, the circular flow model is also the simplification of the reality.

Circular flow models also include government’s role, rile of the financial institutions and also, the role of the foreign firms that are in conduct of the business.