Question

With the help of relevant examples, explain the meaning of leakages in the circular flow of income.

Answer 1

Leakages are amounts of income that are removed from the circular flow and not used to buy domestic goods and services. They reduce the amount of income available in the economy.

Examples of leakages:

1. Savings (S): Income saved in a bank rather than wasted.
   E.g., A household saves ₹ 10,000 instead of spending it on goods.
2. Taxes (T): Income collected by the government from individuals and businesses.
   E.g., ₹ 5,000 paid as income tax.
3. Imports (M): Amount spent on foreign items.
   E.g., buying an imported mobile phone.