Injections and Withdrawals

Injections and Withdrawals

In the simple model of the circular flow we looked at in 2.4.1, the level of national income was in stable equilibrium; all income received by households was spent on the goods and services produced by firms.

In the real world, the circular flow is more complex; there are additional kinds of spending that are not from households. These are called __injections (J) __into the circular flow.

There are 3 Injections

  1. Investment (I) – Spending by firms on machines, buildings and stocks of materials and components
  2. Government spending (G) – Spending on public services, undertaken by central government and local authorities
  3. Exports (X) – Spending by other countries on goods and services produced in the domestic economy

There are also __withdrawals (W) __or __leakages __from the circular flow. These are income that is not spent on domestically produced goods and services.

Again, There are 3 Withdrawals

  1. Saving (S) – households usually save some of their income rather than spend it. Firms may also retain some of their profits so that they can finance some of their investment.
  2. Taxes (T) – are paid by households and firms; this also reduces the amount of income that can be spent.
  3. Imports (M) – spending on goods and services produced abroad is not passed on in the domestic economy.

A revised model showing J and W is shown in _Fig 1 _below:

Injections and Withdrawals, figure 1


In an economy where there are injections and withdrawals, the level of national income (Y) will be in equilibrium (no tendency to rise or fall) provided that:

Total Injections (I + G + X) = Total Withdrawals (S + T + M)

If injections are greater than withdrawals, Y will increase. As Y increases, S, T & M will also increase, as households will save more, pay more tax and buy more goods from abroad. Y will continue to rise until injections and withdrawals are equal.

If withdrawals are greater than injections, Y will fall. As Y falls, withdrawals will fall until injections and withdrawals are equal.

Injections and Withdrawals, figure 1