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The Circular Flow Of Income And The Affect Of Leakages And Injections On Commercial Activity In Our Economy

682 words - 3 pages

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The Circular Flow of Income and �The affect of Leakages and Injections on Commercial activity in our Economy�

In economics the Circular flow of income refers to the simple economic model which describes the circulation of money and good and services between producers and consumers in our economy. There are five main sectors that make up the model including: households, firms, financial Sector, government sector and overseas sector.�

In the economy the different sectors influence the rate of injections and leakages. Injections that come from the various sectors boost our economy and the circular flow grows. The three main injections in the circular flow of income model are investment expenditure (Financial sector), government expenditure (Government Sector) and exports (Overseas sector). Injections are seen to increase commercial activity in our economy as the money is being put into the circular flow causing business to rise. This is a result of the injections as they have the effect of stimulating the economy.

Leakages in the circular flow of income model are saving (Financial Sector), taxes (Government sector), Imports (Overseas Sector). These are all leakages because they are "leaked" out of the core circular flow of consumption, production and income. In simple terms the result of leakages in our economy is the reduced commercial activity, depending on the balance between the leakages and injections.�

In our economy when leakages are greater than injections in the circular flow of income model the circular flow of income shrinks causing the economy to contract, which can lead to recession if recurring for a prolonged period of time. This is a result of increased savings, taxation and imports being greater than...

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