The circular flow of income, injections and leakages

Overview

Recall questions on the circular flow of income between households and firms, injections and leakages, and the equilibrium condition with a worked example.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What does the circular flow of income model show?

   Model answer

   It shows how income, output and expenditure move continuously between households and firms, with injections adding to the flow and leakages withdrawing from it.

2. 2

   In the simple two-sector circular flow, what do households provide and what do they receive?

   Model answer

   Households provide the factors of production to firms and receive factor incomes in return: wages, rent, interest and profit.

3. 3

   In the simple two-sector circular flow, what do firms provide and what do they receive?

   Model answer

   Firms provide goods and services to households and receive consumer expenditure in return.

4. 4

   Define an injection into the circular flow and name the three injections.

   Model answer

   An injection is spending entering the flow from outside household consumption of domestic output; the three are investment, government spending and exports.

5. 5

   Define a leakage from the circular flow and name the three leakages.

   Model answer

   A leakage is income received but not passed on as spending on domestic output; the three are saving, taxation and imports.

6. 6

   State the condition for equilibrium in the circular flow of income.

   Model answer

   Total injections equal total leakages, so saving plus taxation plus imports equals investment plus government spending plus exports and national income is neither expanding nor contracting.

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