Answer to Question #49249 in Macroeconomics for sanghamita Ghosh

Question

After 1991 economic liberation, the circular flow of income is greatly affected specially with reference to foreign trade transactions. explain the statement.

Answer 1

The circular flow of income and spending illustrates the linkages between different sectors of the macroeconomy. International trade plays an increasingly important role in shaping the performance of the economy. The value of exports sold overseas will be injected into the circular flow, whilst spending by consumers and businesses on imported products represent a leakage from the flow. (Goods and services are coming into the economy to satisfy domestic demand, but money to pay for them is flowing out of the economy). That's why, after 1991 economic liberation, the circular flow of income is greatly affected specially with reference to foreign trade transactions.