The Operation of an Economy- 4. Circular Flow of Income

Circular Flow of Income

A model that illustrates the flow of money, resources, and goods in an economy among different sectors.

Individual Household Sector

Households that provide economic resources like land, labor, and capital to businesses in exchange for wages.

Leakages

Money that is removed from the circular flow of income, such as savings, taxes, and imports.

Injections

Flows of money that can increase aggregate income and economic activity, such as investment and government expenditure.

Government Expenditure (G)

Spending by the government on services and projects, which acts as an injection into the economy.

Financial Sector

Institutions like banks that manage savings and investments to facilitate business growth.

Exports (X)

Goods and services sold to foreign countries, contributing an injection into the domestic economy.

Imports (M)

Goods and services bought from foreign countries, representing a leakage from the domestic economy.

Equilibrium in Circular Flow

A state where total leakages equal total injections in an economy.

Economic Growth

The ideal situation in an economy where injections exceed leakages.

Savings (S)

Money set aside by individuals that is not spent in the economy, representing a leakage.

Tax (T)

Mandatory contributions to government revenue that act as a leakage from the economy.

Investment (I)

Expenditure that firms make to expand production, serving as an injection in the economy.