injections-and-withdrawals

Injections & Withdrawals

• Money can enter or leave the circular flow of income in an economy

• Injections add money into the circular flow of income and increase its size

  • Increased government spending (G)

  • Increased investment (I)

  • Increased exports (X)

• Withdrawals or leakages remove money from the circular flow of income and reduce its size

  • Increased savings by households (S)

  • Increased taxation by the government (T)

  • Increased import purchases (M)

Diagram analysis

• The relative size of the injections and withdrawals impacts the size of the economy:

  • Injections > withdrawals = economic growth

  • Withdrawals > injections = fall in real GDP

• Injections represent new income in the economy

• The multiplier effect can cause the economy to grow by a greater amount than the size of the injection

  • E.g. If government spending increases, the money becomes income for households who then spend it purchasing goods/services from firms, who then spend some of it on purchasing raw materials

• Changes to any of the factors that influence government spending, investment, consumption and net exports will increase/decrease the relative size of the circular flow of income

  • E.g. An increase in interest rates will increase savings (withdrawal), and reduce consumption and investment