LEGO country flags were a cool item that TLG once produced, especially the early (1957-72) wavy country flags (printed and embossed). From 1973 to 1979 TLG also made straight stickered flags. Sadly TLG no longer makes country flags... just cartoonish fantasy flags for Pirates, Castle and other themes.
Chapter 47 - LEGO Town Accessories - of my Unofficial LEGO Sets/Parts Collectors Guide talks at length about all the common and rare country flags from 1957 (introduction) until 1982 (last production).
LEGO Country flags were first introduced in fall 1957, when a Danish retailer announcement mentioned them for the first time... they later started appearing in all European 1958 LEGO catalogs.
There were 15 different country flags (and the LEGO flag) introduced in 1957... by 1958 one of these was retired, and in 1959 the flag of Finland became the new 15th country flag. Here is also an image of all 15 country flags from the 1960 introduced 238 Building Idea Book No. 1.