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Why do total leakages and total injections have to be equal?

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armyof32000 | Salutatorian

Posted July 17, 2013 at 7:33 PM via web

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Why do total leakages and total injections have to be equal?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted July 19, 2013 at 1:50 AM (Answer #1)

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Injections and leakages come into play when we expand the circular flow model past its basic version.  Injections must equal leakages because the amount of money coming into a sector of the economy must equal the amount of money that leaves that sector.

In the basic version of the circular flow model, households get all of their income in return for the services that they provide those businesses.  They then take all of the money that they received and they spend it buying all of the goods and services that those businesses created.  But we know that this is not everything that happens in an economy.  There are also other sources of income, called “injections” and other ways that money can be spent, called “leakages.”

There are three kinds of injections.  These are investment expenditures (money that businesses spend on final goods and services that they buy from other businesses), government purchases, and exports.  There are three kinds of leakages.  These are savings, taxes, and imports. 

If the injections and the leakages do not equal one another, then something is wrong.  Money is entering the economy without leaving or, alternatively, money is leaving the economy without having entered it in the first place.  Neither of this is possible.  Therefore, injections must equal leakages.

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