Learning Objectives

Effect of Leakages and Injections on the Circular Flow of Income

Injections and leakages represent money being pumped into the economy (injections) or money escaping out of it (leakages.) If more money is circulating the economy this means that incomes rise, unemployment decreases and spending increases. This forces total income to rise. If money is leaking out of the economy, incomes may falls, unemployment will rise and total spending will decrease. This forces total income to fall.

As shown by the table, if total injections are larger than total leakages then aggregate income will rise. (I + G + X > S + T + M) The opposite occurs when total injections are less than total leakages, then the aggregate income will fall. (I + G + X < S + T + M) This is present in each sector also, each affecting consumer confidence and, in turn, spending habits or households, firms, governments and international traders.