Living Economics: Injections and Leakages - Planned vs Realized
The circular flow of income or circular flow is a model of the economy in which the major . [we may view the] economic organization as a system of prize relations. . As long as leakages are equal to injections, the circular flow of income. Leakages (withdrawals) from the circular flow An economy is in equilibrium when the rate of injections = the rate of withdrawals from the. This brings us to another key point. There are no injections into this circularflow and no leakages from the circular flow (like saving) at this stage. Hence, Income.
Injections and Leakages - Planned vs Realized An open economy allows for more varied interplays between planned vs actual leakages and injections among countries. What is produced must be purchased to sustain the current level of economic activities.
In other words, what is not consumed leakage s in the income stream must be plowed into the economy in the form of investment injection s. Now, realized actual leakages from the spending streams and realized actual injections into the spending streams are what actually happened.
They must be equal by necessity. For example, goods actually supplied must be equal to goods actually demanded. What was not sold went into unsold inventory. The basic principles of Keynesian economics were developed by Keynes in his book, The General Theory of Employment, Interest and Money, published in This work launched the modern study of macroeconomics and served as a guide for both macroeconomic theory and macroeconomic policies for four decades.
Circular flow of income - Wikipedia
Injections and Leakages One half of the injections-leakages model is injections, which are non- consumption expenditures on aggregate production. The three injections are investment expendituresgovernment purchasesand exports. These are termed injections because they are "injected" into the core circular flow of consumption, production, and income.
The other half of the injections-leakages model is leakages, which are non-consumption uses of the income generated from production. The three leakages are saving, taxesand imports. These are termed leakages because they are "leaked" out of the core circular flow of consumption, production, and income. Equilibrium in the injections-leakages model relies on a balance between the injections into the core circular flow and leakages out of the flow. If leakages match injections, then the volume of the core circular flow does not change.
This is the same as achieving a balance between the water flowing form a faucet into a sink and that flowing out through the drain. When these two flows are equal, then the total amount of water IN the sink does not change. The Circular Flow The Circular Flow Injections and leakages can be best illustrated using the standard circular flow model of the macroeconomy, such as that presented in the exhibit to the right.
The circular flow is a handy model of macroeconomic activity that highlights the interaction between households and businesses through the product and resource markets. The business sector is at the right and the household sector is at the left. The product markets are at the top and the resource markets are at the bottom. The household sector buys production from the business sector through the product markets.
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Expenditures by the household sector are consumption expenditures. Revenue going to the business sector is gross domestic product. The business sector hires factor services from the household sector through the resource markets.
Payments made by the business sector are factor payments. A residual of each market comes in capital market as saving which in turn is invested in firms and government sector.
Technically speaking, so long as lending is equal to the borrowing i. However, this job is done by financial institutions in the economy. Rest of the world sector: The five sector model of the circular flow of income is a more realistic representation of the economy. Unlike the two sector model where there are six assumptions the five sector circular flow relaxes all six assumptions.
Since the first assumption is relaxed there are three more sectors introduced. Circular flow of income topics[ edit ] Leakages and injections[ edit ] In the five sector model, there are leakages and injections Leakage means withdrawal from the flow.
When households and firms save part of their incomes it constitutes leakage. They may be in form of savings, tax payments, and imports. Leakages reduce the flow of income. Injection means introduction of income into the flow. When households and firms borrow the savings, they constitute injections. Injections increase the flow of income. Injections can take the forms of investment, government spending and exports.
As long as leakages are equal to injections, the circular flow of income continues indefinitely. Financial institutions or capital market play the role of intermediaries. This means that income individuals receive from businesses and the goods and services that are sold to them do not count as injections or leakages, as no new money is being introduced to the flow and no money is being taken out of the flow. Leakages and injections can occur in the financial sector, government sector and overseas sector: In the financial sector In terms of the circular flow of income model, the leakage that financial institutions provide in the economy is the option for households to save their money.
Circular flow of income
This is a leakage because the saved money can not be spent in the economy and thus is an idle asset that means not all output will be purchased. An example of a group in the finance sector includes banks such as Westpac or financial institutions such as Suncorp. In the government sector The leakage that the Government sector provides is through the collection of revenue through Taxes T that is provided by households and firms to the government.
This is a leakage because it is a leakage out of the current income thus reducing the expenditure on current goods and services. The injection provided by the government sector is Government spending G that provides collective services and welfare payments to the community.