Using a diagram, outline the main features of the five sector circular flow of income model of the Australian economy. Explain how leakages and injections influence the level of economic activity.
In order for any economy to function properly there must be a flow of income. The Australian economy has a five sector circular flow of income. The five sectors comprise of individuals, businesses (firms), financial sector, government sector and international (overseas) sector. The circular flow of income is a model of the economy in which the exchanges are represented as flows of money, goods and services, the flows of money and goods exchanged in a closed circuit correspond in value, but run in the opposite direction.
In the five sector model, there are leakages and injections. Leakage means withdrawal from the flow. When individuals and businesses save part of their incomes it constructs/creates a leakage. They may be in form of savings, tax payments, and imports. Leakages reduce the flow of income. This means income/ money is being taken out of the economy.
Injection means introduction of income into the flow. When individuals and businesses invest the money, they create injections. Injections increase the flow of income. Injections comprise of investment, government spending and exports. Leakages are equal to injections, the circular flow of income continues indefinitely only if they are equal.
Businesses play the role of the broker, this means that income individuals receive from businesses and the goods and services that are sold to them do not count as injections or leakages, as new money is not being introduced or taken. This is the same for businesses if they save there money there is a leakage because the money is being saved not spent into the economy. The injection businesses provides to the financial sector is investment.
In the government sector the leakage that the government provides is through the collection of their money which is taxes. They receive revenue through many different forms of taxes. Thus the money is a form of income which reduces expenditure on goods and services until there is an injection which is when the government spends their money called government spending (G). Forms of government spending comprise of welfare/transfer payments (pension), and infrastructure. Thus the government leakage is collecting tax and the injection to the economy is welfare payments and infrastructure.
In the international sector the...