Question

What are the sources of circular flow leakages and injections in the macro economy?

Answer 1

Solution: The sources of Leakages and Injections in the economy are:

Leakages = Taxes + Savings + Imports

1. Taxes -These are the direct and indirect taxex paid by the firm and the household.

2. Savings-These are the savings of the firms and household in the financial institutions.

3. Imports- These are the imports of goods and services from rest of the world.

These three element will reduce the flow of income under circular flow of Income.If you see taxes ,we have to pay taxes out of our income ,so the level of income in the circular flow will reduce.In the similar manner we can think for other factors also.

Injections = Investment + Exports + Government expenditure.

Investment- Investment is the addition to the stock of capital in the income. Investment produces return which will increase the flow of income under circular flow of income. Exports brings money income from outside country which increases the level of income in te circular flow of income.Government expenditure in the economy increases the level of aggregate demand in the economy which in return raises the income level of the economy ,this will increase the flow of income in the circular flow.

Injections are those components in the circular flow of income will increases the flow of income in the circular flow while Leakages are those withdrawls from the circular flow of income which reduces the flow of income in the circular flow of income.

In order to have have stability in the economy withdrawls should be equal to Injections.