Injections and Leakages
Definition
Injection: spending added to the circular flow from outside the household-to-firm loop.
Leakage (withdrawal): income taken out of the flow rather than passed on as domestic spending.
The Three Injections
- Investment (I) is firms' spending on capital goods, e.g. £150bn on machinery and factories; it adds demand because the income does not come from households' current spending.
- Government spending (G) is state spending on goods and services, e.g. £200bn on schools and roads, financed from taxation or borrowing.
- Exports (X) are foreigners' spending on domestic output, e.g. £120bn of exported goods; the income originates abroad and enters the domestic flow.
- Cause → effect: each injection raises the income flowing to domestic firms and households, so a rise in I, G or X tends to raise national income, ceteris paribus.
The Three Leakages
- Saving (S) is income households set aside rather than spend, e.g. £200 of a £2,000 wage; it withdraws demand because it is not passed on to firms.
- Taxation (T) is income the government takes, e.g. £400 of that wage; it withdraws income before households can spend it.
- Imports (M) are spending on foreign output, e.g. £300 on imported electronics; the income leaves the domestic flow and becomes income abroad.
- Cause → effect: each leakage removes income from the domestic flow, so a rise in S, T or M tends to lower national income, ceteris paribus.
Key Idea
- Injections are investment, government spending and exports (I, G, X).
- Leakages are saving, taxation and imports (S, T, M).
- Injections add spending to the flow; leakages withdraw it.
Example
- In one year an economy has I = £150bn, G = £200bn and X = £120bn, with S = £180bn, T = £210bn and M = £130bn.
- Leakages exceed injections by £520bn − £470bn = £50bn, so more income is withdrawn than added and the flow of income tends to shrink.
Exam technique
- Learn the pairs together: I, G and X are injections; S, T and M are leakages.
- Identify the sector behind each flow: firms, the government or the international economy.
Common Mistake
- Do not treat imports as an injection; they withdraw income, so they are a leakage.
- Government spending is an injection but taxation is a leakage, even though both involve the state.
Self review
- Define an injection and a leakage.
- Name the three injections and give an example figure for each.
- Name the three leakages.
- Why does a rise in imports reduce the domestic flow of income?
