Circular Flow of Income

The Circular Flow of Income:

• the circular flow of income model is a highly simplified model of the economy

• it illustrates how agents in the economy interrelates and identifies income (Y) flows

• it helps to determine upturns and downturns in the economy by analysing equillibrium through leakages and injections.

LEAKAGES: this refers to money that is leaving the economy (S savings, T tax, M imports)

INJECTIONS: this refers to money that is put into the economy (I investment, G gov. spending, X exports)

Equillibrium in the economy:

Equillibrium occurs when aggregate demand = aggregate supply. (aggregate, total …. in the economy)

OR injections = leakages

Upturn: injections > leakages (I+G+X > S+T+M)

Downturn: injections < leakages (I+G+X < S+T+M)