Leakages Vs Injections
In an economy, there can be expansion or contraction of the circular flow of income wherein the former refers to the increase in the income level/output level in the economy. Whereas the latter implies the fall in the level of income or output. The expansion of circular flow is due to injections, but the contraction of the circular flow is because of leakages, i.e. withdrawals.
The main difference between leakage and injection is that which injections accelerates the speed of economic activities, whereas leakages slow down the circular flow of income.
What are Leakages?
Leakage in the circular flow of income represents a situation which occurs when some money is withdrawn, through some macroeconomic variable.
Leakages occur when the households and firm save a certain portion of their income and is not used to buy goods and services. So, this part remains idle and is not used to perform economic activity which results in leakages. It can be in savings, tax payments and imports. Hence, it is an outflow of income, which reduces the income flow.
It brings about a fall in the income circulating in the economy. This means that it is any proportion of income, which is pulled out from the circular flow of income. It includes:
- Savings: That portion of the income of a household or firm which is not spent on purchasing goods and services, or distributed as profit, but retained for future.
- Imports: Goods bought from foreign countries and so the payment is made to foreign countries, which is an outflow of income from the economy.
- Taxes: Taxes is the amount paid by the individuals and firms to the government. It flows to the government and not to the goods market.
Hence, Leakages = Savings + Taxes + Imports
In a nutshell, leakages reduce the overall magnitude of income from the circular flow.
In case of leakage, the consumption level in an economy declines. Also, it results in the reduction in the equilibrium level of national income, unless the leakages are counterbalanced by injections.
What are Injections?
Simply put, injections are the inflow of income to the circular flow. It occurs when some money is introduced into the flow. Therefore, if the households and firm borrow savings, it amounts to injections. It can be investment, government spending and exports. It increases the income flow.
It originates from outside of the circular flow of income. Injections in the circular flow of income indicate a situation which takes place when some accretion is made by the macroeconomic variable. It includes:
- Exports: Goods sold to foreign countries by the firms, tends to increase the income flow as payment is received from the foreign countries for the purchase of domestic goods. Hence, it injects income from foreign market to the domestic financial market.
- Investments: That portion of income which is put to purchase the capital asset, which generates a return in future. It is the total expense made by the firm on capital expansion, which infuses money to the goods market.
- Government Expenditure: Total consumption expenditure made by the government, be it central, state or local self-government, on purchase of goods and services, providing subsidies to the firms and transfer payments (social security schemes, pensions, retirement benefits, etc.) to the households.
So, Injections = Investments + Government Expenditure + Exports
Difference Between Leakages and Injections
Read out the points stated below, to have a clear understanding of leakages and injections:
Injections cover such macro variables, an increase in the level of which may result in an increase in the level of output. On the other hand, Leakages covers such macro variables, an increase in the level of which may result in a decrease in the level of output.
In the case of leakages, the macro variables have a negative effect on the production process and generation of income. As against, in case of injections, the macro variables results in a positive impact on the production process of the generation of income.
Leakages occur when the potential planned expenditure on domestic output is taken out of the income-expenditure flow. Thus it reduces the size of the circular flow of income. On the contrary, injections occur when there is an inclusion of potential planned expenditure on the domestic output to the income-expenditure flow, which tends to increase the size of the circular flow of income.
Occurs due to
The macroeconomic variables resulting in leakages are government consumption, government investment and exports, whereas the macroeconomic variables resulting in injections are savings, government taxes and imports.
Leakages result in a contraction in the production process or income generation and reduction in demand for goods and services. As against, Injections may result in an expansion in the production process or income generation and generation of demand for goods and services.
Quick Comparison: Leakages Vs Injections
|Concept||Leakages are basically withdrawal from the circular flow of income.||Injections are nothing but additions to the circular flow of income.|
|Represents||Income earned by the household, but not spent.||Spending on final goods along with consumption.|
|Variables||Government consumption, Government investment and Exports.||Savings, Government Taxes and Imports.|
|Size of the circular flow||Reduces||Increases|
|Result||Contraction in the production process or income generation.||Expansion in the production process or income generation.|
|Reduction in demand for goods and services.||Generation of demand for goods and services.|
To reach equilibrium or economic stability, the total planned leakage must tally total planned injections which amount to the same equilibrium as aggregate production and aggregate expenditure.
A balance between these two ensures a continuous flow of income, consumption, production and factor payments circulating in the different sectors. So, during the time that leakages are equal to injections, the circular flow of income continues for an indefinite period.