Circular Flow: Injections & Leakages

What does the circular flow of income and spending show?

It shows the connections between different sectors of the economy, including flows of goods, services, and factors of production between firms and households.

How is national income or GDP illustrated in the circular flow?

Businesses produce goods and services for the factors of production provided by households, thus generating incomes in the form of wages, salaries, and profits.

What are leakages (withdrawals) from the circular flow?

A3. They are portions of income not spent by households on domestic goods and services. Some amount of money that does not go into businesses include:

1. Savings (S)

2. Taxation (T)

3. Imports (M)

What are withdrawals?

They reduce the circular flow of income, leading to a multiplied contraction in production and output.

What are injections into the circular flow?

A5. Additions that increase spending and income in the economy:

1. Investment (I)

2. Government Spending (G)

3. Exports (X)

How do injections affect the economy?

They boost the circular flow of income, leading to a multiplied expansion of production and output.

Give examples of injections in the economy

• Investment in new technology (I)

• Government spending on defence (G)

• Exports of domestic goods/services (X)

When is the economy in equilibrium in the circular flow model?

When the rate of injections equals the rate of withdrawals:
(I + G + X) = (S + T + M).

(Investments + Government spending + Exports) = (Savings + Taxes + Imports)

Why are savings considered a leakage?

Because income saved is not spent directly on goods and services, reducing money flowing to businesses.

Why are exports considered an injection?

Because they bring additional spending into the economy from overseas consumers.