Injections & Withdrawals into the Circular Flow (AQA A Level Economics)

• Money can enter or leave the circular flow of income in an economy
  • Injections represent new income in the economy
  • Withdrawals are the leakage of money from the economy
      
• Injections add money to the circular flow of income and increase its size
  • Increased government spending (G)
  • Increased investment (I)
  • Increased exports (X)
     
• Leakages (withdrawals) remove money from the circular flow of income and reduce its size
  • Increased savings by households (S)
  • Increased taxation by the government (T)
  • Increased import purchases (M)
     
• There are high levels of interdependence between households, firms, the government, the financial sector, and the foreign sector (foreign firms and households)

Diagram: Injections & Leakages  

If the injections > leakages, national income will increase and the economy will grow 

Diagram analysis

• Government: Government spending (G) is an injection and taxation (T) is a leakage
• Financial sector: Investment (I) is an injection and savings (S) is a leakage
• Foreign sector: Exports (X) is an injection and imports (M) is a leakage
   
• The relative size of the injections and withdrawals impacts the size of the economy
  • Injections > withdrawals = economic growth and increase in national income
  • Withdrawals > injections = economic decline and a fall in national income
     
• Changes to any of the factors that influence government spending, investment, consumption and net exports will increase or decrease the relative size of the circular flow of income
  • E.g. An increase in interest rates will increase savings (withdrawal) and reduce consumption and investment

• The determinants of savings refers to the factors that influence an individual (household) decision to save money rather than consume it immediately
• Disposable income can either be saved or spent on goods/services (consumption)
  • When savings decrease, consumption usually increases
  • When savings increase, consumption usually decreases
    
    
• The household savings ratio calculates household savings as a proportion of household income
  • This percentage is often low when an economy is booming and full of confidence - and vice versa
  • During lockdown in 2020 this ratio reached a record high in the UK of around 25%
    
    
• The difference between savings and investment is:
  • Savings is the portion of income by households that is not spent / consumed 
  • Investment is expenditure by firms on capital goods eg. machinery and equipment. The spending is geared toward enhancing productivity
    • Firms can also save profits, without spending them 

• The equilibrium national income level is where withdrawals are equal to injections
• This is also where aggregate demand is equal to aggregate supply
   
• Full employment is the level of income at which an economy is operating at full capacity
• It is operating on its production possibility frontier with no spare capacity