![]() ![]() For example, they put their savings into deposits, stocks, and bonds.īecause it is not spent on domestic goods and services, saving represents leakage from within a circular flow diagram. Households do not spend their income on goods and services. So, how much is leaked and injected can be more comparable. The examples above are usually paired together. Money flows from the outside into a circular flow diagram. Meanwhile, investment, government spending, and exports are examples of injections. They are drawn from circular flow diagrams, so they cannot be used to generate further output. Savings, taxes, and imports are examples of leakage. What are examples of leakages and injections? Or, they collect money from financial markets to invest, so money flows from financial markets, not from selling products to the household sector. For example, money flows into the business sector when selling products to the government. Or money flows in from external sources, so the business can use it to generate further output. And some is spent on goods and services but is produced by the economy abroad (imports). And some are paid as taxes by businesses and households. Some may flow out (withdrawn), for example, because it is not spent on domestic goods and services but saved. However, the money may not fully circulate between the two sectors. Money flows into the business sector in the product market, which then flows into the household sector in the factor market. Second, the principal transactions involve the business sector and the household sector. Money from foreigners flows into the domestic economy. ![]() ![]() For example, if goods and services are sold to the external sector, the income received represents an injection. When we discuss this model, we are talking about domestically produced goods and services. We need to highlight a few things about the circular flow of income (in this article, I may use the terms circular flow model or circular flow diagram interchangeably).įirst, the model describes an economy. How do injections and leakages affect the circular flow of income? And it then flows back into the household sector in the factor market when businesses buy inputs from the household sector. In other words, money moves from the household sector to the business sector. Income flows to the business sector through goods and services sold. Thus, when we draw the relationship between the household and business sectors, we produce a circular flow of income. As compensation for the inputs they provide, households earn income. In this market, the household sector supplies the input. Then, the business uses the income to buy inputs in the factor market. For example, companies produce products and sell them to the household sector in the product market. What is a circular flow of income?Ī circular income flow is an economic model to illustrate how goods, services, and income flow between businesses and households in an economy. Let’s briefly discuss a circular income flow to understand leakages and injections. Examples are investment, government spending, and exports. Decrease in GDP growth means that the output of an economy is still growing but at a slower rate.In contrast, injections represent what goes into a circular flow of income. Decrease in GDP means that output of an economy is actually falling. You must also know the distinction between a decrease in GDP and a decrease in GDP growth. Increasing government expenditure and shrinking tax revenue.Recession occurs when GDP falls for at least two consecutive quarters, hence takes place shortly after booms/peaks (right when GDP begins decreasing):.Growing tax revenue (possibly falling government expenditure on e.g.Recovery takes place after troughs right when GDP starts growing again:.Shortage of factors of production (most probably labour).The business cycle also known as the trade cycle shows growth of an economy around the long term trend (dashed line) measured by changes in GDP.Ĥ facts to know about the business cycle: The income in the circular flow is always equal to the national income, however this equilibrium does not necessarily mean the economy is at full employment. Income going into the flow is called injections and income going out of the flow is known as leakages.Įquilibrium of national income is reached when (planned) Injections = (planned) Leakages. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |