The Effect of Changes in Injections & Withdrawals on National Income
- Money can enter or leave the circular flow of income in an economy
- Injections represent new income in the economy
- Withdrawals are the leakage of money from the economy
- Injections add money to the circular flow of income and increase its size
- Increased government spending (G)
- Increased investment (I)
- Increased exports (X)
- Leakages (withdrawals) 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)
- There are high levels of interdependence between households, firms, the government, the financial sector, and the foreign sector (foreign firms and households)
Diagram: Injections & Leakages
If the injections > leakages, national income will increase and the economy will grow
Diagram analysis
- Government: Government spending (G) is an injection and taxation (T) is a leakage
- Financial sector: Investment (I) is an injection and savings (S) is a leakage
- Foreign sector: Exports (X) is an injection and imports (M) is a leakage
- The relative size of the injections and withdrawals impacts the size of the economy
- Injections > withdrawals = economic growth and increase in national income
- Withdrawals > injections = economic decline and a fall in national income
- Changes to any of the factors that influence government spending, investment, consumption and net exports will increase or 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
Exam Tip
Remember to consider the net effect and proportionality of the injections and withdrawals. For example, if the size of government spending is large, it is likely to completely outweigh the combined withdrawals of savings and imports.
The size of the multiplier is dependent on the marginal propensity to consume (MPC), the marginal propensity to save (MPS), the marginal propensity to import (MPM), and the marginal propensity to be taxed (MPT).