1. Circular flow of income,
leakage and injections.

2. Circular flow of income?????
• The term circular flow of income or
circular flow of economic activity refers to
“a simple economic model which describes
the circulation/flow of income between
producers and consumers”.
• In the circular flow model, producer and
consumer are referred to as "firms" and
"households" respectively.

3. Significance of Study of Circular Flow of Income
Measurement of National Income- National income is an estimation of
aggregation of any of economic activity of the circular flow.
It is either the income of all the factors of production or the expenditure
of various sectors of economy.
Knowledge of Interdependence- Circular flow of income
signifies the interdependence of each of activity upon one another
Unending Nature of Economic Activities- It signifies that production,
income and expenditure are of unending nature, therefore, economic
activities in an economy can never come to a halt.
National income is also bound to rise in future.
To understand about the leakages in economy and injections

4. Foreign Household
sector
Determinants
Firms/
business
Financial
institutions

5. HOUSE HOLD

6. Households:
It is a person or a group of people that share their
income. The members of households have two
functions:
they supply different factors of production
members of household also work as consumers

7. FIRMS

8. Firms:
An organization that produces goods and
services for sale.
main objective is to maximize profit in the
production process.
The two main functions are as follows:
Produce goods and services and supply them
in the market.
Firms purchase inputs or raw materials from
households to use them in the production
process

9. GOVERNMENT

10. Government
Just like households and firms the government also
earns incomes and makes expenses. Two major
functions played are:
Government earns revenue either from tax or non-tax
sources both from households and firms.
Government provides essential public services such as
maintenance of law and order, defence services, judiciary
etc.

11. FINANCIAL INSTITUTIONS

12. Financial institutions
Financial Institution :
consists of banks and non-bank intermediaries
who engage in the borrowing (savings
from households)and lending of money.
the leakage that financial institutions provide in the
economy is the option for households to save
their money.

13. Foreign sector

14. Foreign Market:
It consists of two kinds of international economic
transactions i.e.
export and import of goods and services
inflow and outflow of capital.

15. Have a glance on
Two sector model
Three sector model
Four sector model
Five sector model

16. TWO SECTOR MODEL

22. Three sector model
Three sector model is created by adding the Government sector
to the Two sector model
Three kinds of monetary flows between the government and the
rest of the economy i.e.1)direct taxes on both households and
firms2)government expenditure3)transfer payments and
subsidies
Government spends a part of its tax revenue as factor payments
to the households and a part in the form of transfer payments as
pension and food subsidy etc.

24. Govt borrowings

26. This circular flow of model shows
the four macro economic sectors of the
economy i.e. household, business firm,
government, and financial institutions.
These four sectors capture
four fundamental macroeconomic
functions and their expenditures are
combined together to purchase the
economy's total production.

27. To introduce the financial market, it is assumed
that household saves in the financial market.
There are no inter-households borrowing
If the households save a part of their income in the
financial market (such as banks, insurance
companies, stock market etc), this reduces the
expenditure of household on goods and services
Ultimately it reduces the flow of money/income of the
economy.
So saving known as the leakage of the economy

29. FIVE
SECTOR
MODEL

30. Foreign Market(export and import):
Goods and services produced within the domestic territory
which are sold to the foreigners are called exports.
Purchases of foreign made goods and services by domestic
households are called as imports.
Here we assume that only business forms can interact with
the foreign countries and dealt with the export and import of
the country.
Money goes through import from the economy again return
back to the country through export activities.

32. Leakage Injection
Savings Investments
Taxes Govt. spending
Imports Exports

33. Why savings become a leakage??????
In terms of the circular flow of income model the
leakage that financial institutions provides an option for
households to save their money.
This is a leakage because the saved money can not be
spent in the economy and thus it is an idle asset, that
means no output will be purchased.
The injection that the financial sector provides into the
economy is investment (I) into the business/firms sector.

34. How tax becomes a leakage?????
Tax is paid to Government by households and firms
Tax is a leakage because it is a leakage out of the
current income and reduces the expenditure on current
goods and services
The injection provided by Government on this leakage
is Government spending( services and welfare
payments to the community)
For e.g.. Income tax collected by Govt is a leakage and
Govt spends some amount as food subsidy as an
injection.

35. How Imports becomes a leakage?????
Imports are leakage because it is the spending
by residents into the rest of the world.
It becomes a leakage because the money in the
home market goes to countries abroad.
The main injection provided by this sector is
the exports of goods and services which
generate income for the exporters from overseas
residents.

36. In five sector circular flow of income model, the state of
equilibrium occurs when the total leakages are equal to
the total injections that occur in the economy.
This can be shown as:
Savings + Taxes + Imports = Investment + Government
Spending + Exports
S + T + M = I + G + X.