The circular flow of income
The circular flow
- Households supply factors to firms and earn income (wages, rent, interest, profit), then spend it on goods → money flows back to firms.
Leakages and injections
- leakages take money out: saving, taxation, spending on imports.
- injections put money in: investment, government spending, exports.
- Equilibrium: injections = leakages. Injections > leakages → the economy grows; leakages > injections → it shrinks.
Practice
Which are leakages from the circular flow? (Choose all that apply.)
Saving, taxation and imports take money out; exports, investment and government spending are injections.
Practice
Which is an injection into the circular flow?
Injections are investment, government spending and exports.
Practice
The circular flow is in equilibrium when total injections equal total leakages.
When injections = leakages, the flow is stable; injections > leakages makes it grow.
Open vs closed
- a closed economy has no trade; an open economy trades (has exports and imports).
You've got it
Key idea
- money loops between households and firms
- leakages (saving, tax, imports) drain it; injections (investment, government spending, exports) add to it
- injections > leakages → growth; = → equilibrium