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Questions
Show with the help of a diagram various flows of income in a two-sector model with leakages and injections.
Draw a diagram to show the circular flow of income in a two sector model with leakage and injection.
Diagram
Very Long Answer
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Solution
- Leakage refers to the loss of fluid from the flow. Leakage occurs when businesses and people set aside a portion of their earnings. They could also take the shape of imports and tax payments. Leaks lessen the revenue flow.
- They are imports, savings, and government taxes. Income is introduced into the flow through injections. The savings are considered injections when they are borrowed by businesses and households.
- The income flow is increased by injections. Investments, government expenditure on consumption, and exports are some examples of injections. The circular flow of revenue will never stop as long as leakages (i.e., savings) equal injections (i.e., expenditures). The function of intermediaries is performed by capital markets or financial institutions. Leaks and injections are shown in Fig.
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Notes
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