2.4.2 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)
    
    

A diagram that shows the injections and withdrawals that influence the relative size of the circular flow of income

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