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 a fall in the level of income or output. The expansion of the 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 injections accelerate the speed of economic activities. At the same time, leakages slow down the circular flow of income.
Table of Contents
What are Leakages?
Leakage in the circular flow of income represents a situation which occurs when there is the withdrawal of money through some macroeconomic variable.
Leakages occur when households and firms save a certain portion of their income which is not used to buy goods and services. So, this part remains idle and is not used to perform an 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 the future.
- Imports: Goods bought from foreign countries. So, the payment is made to foreign countries, which is an outflow of income from the economy.
- Taxes: Taxes is the amount paid by 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 a reduction in the equilibrium level of national income unless the leakages are counterbalanced by injections.
Must Read: Difference Between Inflationary Gap and Deflationary Gap
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 households and firms borrow savings, it amounts to injections. It can be investment, government spending and exports. Injections 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 tend to increase the income flow as payment is received from the foreign countries for the purchase of domestic goods. Hence, it injects income from the foreign market into the domestic financial market.
- Investments: That portion of income is put into purchasing the capital asset, which generates a return in future. It is the total expense that a firm makes on capital expansion, which infuses money into the goods market.
- Government Expenditure: Total consumption expenditure made by the government, be it central, state or local self-government, on the 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:
Concept
Injections cover such macro variables, an increase in the level of which may result in an increase in the level of output. Conversely, Leakage covers such macro variables, an increase in the level of which may result in a decrease in the level of output.
Macro Variables
In the case of leakages, the macro variables have a negative effect on the production process and generation of income. In the case of injections, the macro variables positively impact the production process of income generation.
Occurs When
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. At the same time, the macroeconomic variables resulting in injections are savings, government taxes and imports.
Impact
Leakages result in a contraction in the production process or income generation and a 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.
Must Read: Production System
Quick Comparison: Leakages Vs Injections
| Basis | Leakages | 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. |
Wrap Up
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.
