In the circular flow of income and spending, i.e. the basic flow of income and spending between households and firms supplemented by the foreign, financial and government sectors

Question

exports are leakages from the circular flow.


investment is a leakage from the circular flow.


savings are injections into the circular flow.


imports are injections into the circular flow.


taxes are leakages from the circular flow.

Answer 1

In the circular flow of income and spending, the movements of money through different sectors of an economy help to illustrate how income and expenditures are interrelated. Here's a clarification of the terms you've mentioned in relation to injections and leakages:

1. Exports: Injections into the circular flow. When goods and services are sold to foreign buyers, it brings money into the domestic economy.

2. Investment: Injections into the circular flow. When businesses invest in capital goods, it increases spending in the economy.

3. Savings: Leakages from the circular flow. When households save a portion of their income rather than spend it, that money is not circulating in the economy.

4. Imports: Leakages from the circular flow. When goods and services are purchased from foreign sellers, money flows out of the domestic economy.

5. Taxes: Leakages from the circular flow. When households and firms pay taxes to the government, this money is removed from the spending stream in the economy.

In summary, the correct relationships in the circular flow are:

• Exports = Injections
• Investment = Injections
• Savings = Leakages
• Imports = Leakages
• Taxes = Leakages

This balances the flow of income and spending in the economy, with injections stimulating economic activity and leakages reducing it.