Circular flow - a summary
The leakages (W) from the circular flow are:
- Savings (S) - this is households not spending some of their income
- Taxation (T) - this is the tax revenue collected by government
- Imports (M) - This is the flow of spending outwards not the goods and services inwards
The injections (J) are
- Investment (I) - expenditure on capital goods
- Government (G) - spending on all kinds of things (Education, health, Defence and so on)
- Exports (X) - This is the flow of spending outwards not the goods and services inwards
An economy is in equilibrium when total injections (J) equal total leakages (W).
The standard codes used in this model, and in macroeconomics in general, are:
Y = National Income
C = Domestic Consumption
S = Savings
M = Imports
T = Taxation
I = Investment
X = Exports
G = Government Spending
The circular flow model of an economy is very useful within the study of economics. We will be looking at the actions and behaviour of firms and households, and how governments interact with them. We will also look at how changes in the leakages and injections affect the stability of an economy.