Injections: additions to the circular flow that do not come from households spending on domestic output. The three injections are investment, government spending and exports.
Withdrawals (leakages): income that leaves the flow rather than being passed on as spending. The three withdrawals are saving, taxation and imports.
- Think of the circular flow as the water level in a bath.
- Injections are like taps adding water, while withdrawals are like the plughole draining it.
The Six Flows
Investment: firms' spending on capital goods, an injection that adds to demand for domestic output.
Government spending: state spending on goods and services, an injection into the flow.
Exports: spending by foreigners on domestically produced output, an injection of income from abroad.
Saving: income households set aside rather than spend, a withdrawal from the flow.
Taxation: income transferred to the government, a withdrawal from the flow.
Imports: spending sent abroad rather than to domestic firms, a withdrawal from the flow.
- A UK firm building a new factory is an injection of investment into the flow.
- A household buying a foreign-made car is a withdrawal, as the income goes abroad as an import.
Balance and Equilibrium
Equilibrium national income: the level of income at which total injections equal total withdrawals, so there is no net tendency for income to change.
- When injections exceed withdrawals, more spending flows back to firms than leaks out, so firms raise output and national income rises.
- When withdrawals exceed injections, more income leaks out than returns as spending, so firms cut output and national income falls.
- National income settles in equilibrium once injections equal withdrawals, because the flow is neither gaining nor losing income overall.
- The eventual change in income is larger than the initial injection because of the multiplier developed in 2.4.4.
- Scenario: planned injections are investment 100, government spending 120 and exports 140, while planned withdrawals are saving 90, tax 150 and imports 120 (all in billions of pounds).
- Interpretation: injections equal withdrawals at 360, so national income is in equilibrium with no net tendency to rise or fall.
- Germany's large trade surplus means exports are a substantial injection, helping sustain its national income through demand from abroad.
- The UK's higher propensity to import means a larger share of any extra income leaks abroad as a withdrawal, so the same injection lifts domestic output by less.
- Sort each item into an injection or a withdrawal before using it in a chain of reasoning.
- Link a rise in net injections to a rise in national income, and the reverse.
- Do not misclassify imports as an injection; the income leaves the domestic flow, so it is a withdrawal.
- Do not confuse a withdrawal with lost output; it is income leaking out of the flow, not production disappearing.
- Name the three injections.
- Name the three withdrawals.
- What happens to national income when injections exceed withdrawals?
- When is national income in equilibrium in this model?
- Why are imports a withdrawal?
