2.4.2 - injections + withdrawals

what can happen in the circular flow of income in an economy

money can enter/leave (injection/withdrawal)

3 types of injections you can have into the economy

GIX:

government spending

investment

exports

3 types of withdrawals (aka leakages) you can have from the economy

STM:

savings [by households]

taxation

imports

effects of injections and withdrawals

injection = increase size of economy (economic growth, rise in GDP)

withdrawal = decrease size of economy (negative growth, fall in GDP)

equal injections + withdrawals = economy in equilibrium

how could the economy potentially grow beyond the size of an injection

the MULTIPLIER EFFECT:
for example…

• gov spending increases

• more income for households

• they consume more goods + services from firms

• they hire more workers

• more disposable income = AD increases again

• more tax revenue = gov can spend again to restart the process

define the multiplier effect

when an injection into the circular flow of income cases the real national income to rise by a greater amount

what could change the size of the circular flow of income

change in factors influencing any of G, I, C, (X-M)