WITHDRAWALS AND INJECTIONS IN CIRCULAR FLOW OF INCOME

1)      Withdrawals or Leakages- A withdrawal or leakage from the circular flow is income received by one sector that is not passed on to the other sector. For example, Factor of production do not spend their income on the goods and services produces or if part of income earned by the firms by selling goods and services is not spent on the purchase but kept as a profit are withdrawals .

2)      Injection of Income- Injection of income refers to an increase in income outside the circular flow in some other manner. For example, if the producing sector borrows money from the capital market to make payment to the factor of production, then it is injection of income by the firms. Because in such case, firms are not making use of circular flow of the income. They are making payment to factors by borrowing from external agency.

Main Withdrawals and Injections
Sector
Withdrawals
Injections
1)      Household
Saving
-
2)      Producing
Saving
Investment
3)      Government
Taxes
Government Expenditure
4)      Rest of the World
Imports
Exports
WITHDRAWALS
INJECTIONS
1)      Saving- Saving is the excess of income over consumption. If saving is not utilized as investment, national income will go down.
     S=Y-C   (Here, S=Savings, Y=Income Flow, C=Consumption Flow)
1)      Investment- If the investment is equal to savings then it will not affect flow of income. But generally it does not happen. In modern economics, the main source of investment is the credit created by the banks. In such situation, investment causes increase in the flow of income. Thus, investment serves as an injection in circular flow of income.
2)      Taxes- When the government levies taxes on the firm then their income goes down, resulting decrease in income flowing to the household from the firm. When taxes are levied on household, there is fall in income flowing from household to firm. Thus, income of government through taxes reduces circular flow of income. If the government does not spend its entire income through taxes, then level of circular flow of income will fall. Thus, all types of taxes constitute withdrawals from the circular flow of income.
2)      Government Expenditure- Government expenditure serves as an injection in circular flow of income. There are two type of government expenditure-
a) Transfer payments & Subsidies b) Expenditure on goods and services
3)      Imports- When country imports goods and services from the other countries then the income of that country flows out of the country reducing amount of income in the circular flow.
3)      Exports- When a country exports goods and services to other countries, there will be increase circular flow of national income. Thus, Exports acts as an injection into circular flow of income.

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