CIRCULAR FLOW OF INCOME

CIRCULAR FLOW
OF
INCOME
IN AN ECONOMY
 DEFINITION
• MOVEMENT OF MONEY IN AN
ECONOMY:-
• A model of an economy in which money
moves in one direction and flows of real
resources move in the other.
The circular flow diagram is a simple illustration
to show how income flows through the
economy between producers and consumers.
The diagram makes it clear that consumers and
producers are interdependent. Consumers rely
on producers to make goods and services
available. When consumers buy products,
money flows to producers. At the same time,
producers rely on consumers to provide labor
for production. When labor is provided, people
get paid and that allows them to buy goods and
services.
 The circular flow of income

INJECTIONS

Export
expenditure (X)
Investment (I)
Government
Consumption of expenditure (G)

Factor domestically
BANKS, etc GOV. ABROAD
payments produced goods
and services (Cd)
Import
Net expenditure (M)
Net taxes (T)
saving (S)

WITHDRAWALS
 Leakages and Injections

Within the circular flow, not all

income generated becomes
spending.
A leakage is income not spent
directly on domestic output but
instead diverted from the circular
flow. Consumer savings, imports,
consumer taxes are leakages.
Business saving (retained
earnings) and business taxes are
also leakages.
 Injections
Also within the circular flow, additional
spending is occurring using income not
currently generated. This type of
spending relies upon savings, credit, and
government transfer payments.

An injection is an addition of spending to

the circular flow of income. Business
investment (spending of retained
earnings) and exports are injections.
When consumers spend their savings,
the amount spent is considered an
injection.
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