Civil Engineering Reference
In-Depth Information
injections of funds are carried out by different groups of individuals with different
motivations. It is most unlikely, therefore, that leakages and injections will be equal
and cancel one another out.
Figure 13.2
The circular flow model with injections and leakages
To complete the circular flow diagram, leakages need to be subtracted as households save,
spend money on imports, and pay taxes to the government. And injections need to be
added as businesses benefit from investment funds, export earnings and government
spending.
c
t
P
O
Investments
Savings
Businesses
Households
Exports
Imports
Government
Spending
Tax
pi
re
M
If the total level of leakages is greater than the level of injections, the economy
will become run down, raising unemployment and reducing standards of living. To
take an extreme example, if every household decides to spend its money on imports
from abroad, then this would represent a major leakage of funds from the domestic
circular flow and a significant boost to other countries. Conversely, if the total
level of injections is greater than the level of leakages, the economy will be boosted,
increasing employment opportunities and raising the amount of national income.
EQUILIBRIUM OF THE MACROECONOMY
Equilibrium means a 'balanced state'. In the macroeconomic context, this means
that income, expenditure and output levels continually adjust upwards and
downwards to keep in line with one another. For example, when leakages exceed
injections, expenditure on domestic output will be less than factor incomes.
Consequently, firms will not receive sufficient revenue to cover their output costs.
Stocks will accumulate and firms will cut back output and incomes until they equal
