1 Answer | Add Yours
When using the basic circular flow model, it is possible to add nuance by adding injections to the model and leakages from it. The leakages and injections should cancel one another out, producing equilibrium.
There are three sources of injections that can be inserted into the basic model at the point where households are buying in the product market. These injections come from investment, government spending, and exports. In all three cases, products are bought in the product market, but not by domestic households. Similarly, there are three sources of leakage from households. These are monies that are not used to buy in the product market. These three sources of leakage are savings, taxes, and imports. Here, the households’ money is not going to buy goods and services in the product market. It can therefore be said to leak out of the model.
We’ve answered 317,479 questions. We can answer yours, too.Ask a question