The Circular Flow Model Research Paper Example | Topics and Well Written Essays - 750 words

The Circular Flow Model - Research Paper Example The role of the household and the private firms differ based on the type of market. The factor market involves buying and selling production factors. The factors of production depend on the market since it decides the disbursement of the income. Each of the components is related to the other component of the circular flow model. The product market mainly deals with the process of buying and selling of the goods and commodities. The households are the major buyers of the product market and this improves the flow of goods and the exchange of money and goods. This, in turn, improves the interaction among the firms, the market, and the households.The interaction between these components is strengthened by the role played by the government and the financial institutions. The government has a direct communication and relationship with the firms and the households. Among the various roles played by the government in the circular flow model, the major operations include tax collection, resource allocation, and supply of goods and services. The first and foremost process is the tax collection. The firms and the households are intended to pay a certain amount to the government. This amount is known as the tax and this is calculated based on their income and the expenditure. The tax forms the major portion of the government’s revenue with which the government manages the payments to the households and firms. The government, in turn, provides the goods and services to the households and firms. This is a two-way process in which the necessary monetary help is rendered by the government. Another important task of the government is to provide the local and state governments with the required resources. The local, state and the federal government depend on the government to accomplish their tasks. The role played by the rest of the world in the market is also equally important. Though the government forms an integral part of the circular flow model, the remaining part relies on other factors. The market situation and condition also decides the flow of money and goods and services.