1a. The circular flow of income

How does an economy work? The circular flow of income

It is important to remember that the circular flow is essentially the flow of money. So although when we import a good, that good is now in the UK, the money used to pay for it has gone abroad and therefore represents a leakage. In isolation this would reduce the size of the circular flow.

Therefore, governments need to try and at least balance their injections and leakages and use these to increase production.