The concept of the circular flow of income represents how money moves within an economy among consumers, businesses, and various markets. In this circular flow, three key elements can either add to or reduce the flow of funds: **leakages** and **injections**.
Leakages are the flows of money that exit the circular flow. They reduce the amount of money that circulates within the economy. Common leakages include savings, taxes, and imports. For instance, when individuals save money instead of spending it, that money is not used to purchase goods or services, thus exiting the circular flow.
Injections, on the other hand, are the activities or financial inflows that add funds to the circular flow of income, ensuring continued economic activity. They increase the total amount of money circulating in the economy. These include investment, government spending, and exports.
- Investment: When businesses invest in capital goods, they increase the production capability, leading to more employment and income.
- Government Spending: When the government spends on infrastructure, social services, or other public projects, it injects money directly into the economy.
- Exports: When a country sells goods and services to other countries, new money flows into the country's economy from foreign buyers.
The expenditure approach is a method for calculating a nation's Gross Domestic Product (GDP) by considering the total expenditure on the nation's final output of goods and services in a year. While this approach helps to measure the size of the economy, it is not directly responsible for adding funds to the circular flow. Instead, it relies on the activities of consumption, investment, government spending, and net exports.
In conclusion, it is the concept of injection that directly adds funds to the circular flow, stimulating economic activities and growth by multiplying the effects of initial spending through the economy.
