Leakage and Injection in National Income Accounting

Leakage and Injection are the two important concepts in National Income Accounting that explain the flow of money in the economy. Leakage refers to the diversion of income from the circular flow of income, whereas injection refers to the addition of income to the circular flow of income.

Leakage

Leakage is also known as withdrawal. It refers to the income that is not spent on the goods and services produced in the economy. The three types of leakage are:

1. Savings: Savings refer to the income that is not spent on consumption. This income is kept aside for future use. It is a leakage as it is not spent on the goods and services produced in the economy.

2. Taxes: Taxes are the income that is collected by the government from the people and business organizations. This income is not spent on the goods and services produced in the economy. Therefore, taxes are considered as a leakage.

3. Imports: Imports refer to the goods and services that are purchased from outside the country. When people buy imports, the money flows out of the economy. Therefore, imports are considered as a leakage.

Injection

Injection is also known as addition. It refers to the income that is added to the circular flow of income. The three types of injection are:

1. Investment: Investment refers to the expenditure made by business organizations to increase their production capacity. It is an injection as it adds income to the circular flow of income.

2. Government Spending: Government spending refers to the expenditure made by the government on various projects. This expenditure adds income to the circular flow of income.

3. Exports: Exports refer to the goods and services that are sold to other countries. When people buy exports, the money flows into the economy. Therefore, exports are considered as an injection.

Conclusion

Leakage and Injection are important concepts in National Income Accounting. Leakage refers to the income that is not spent on the goods and services produced in the economy, while injection refers to the income that is added to the circular flow of income. The understanding of these concepts is important for policymakers to manage the economy effectively.

Leakages means withdrawals from circural flow.Not all income will flow from households to businesses directly. The circular flow shows that some part of household income will be:
1.Put aside for future spending, i.e. savings (S) in banks accounts and other types of deposit 2.Paid to the government in taxation (T) e.g. income tax and national insurance 3.Spent on foreign-made goods and services, i.e. imports (M) which flow into the economy
Withdrawals are increases in savings, taxes or imports so reducing the circular flow of income and leading to a multiplied contraction of production (output)

Injections into the circular flow are additions to investment, government spending or exports so boosting the circular flow of income leading to a multiplied expansion of output.

Capital spending by firms, i.e. investment expenditure (I) e.g. on new technology

The government, i.e. government expenditure (G) e.g. on the NHS or defence

Overseas consumers buying UK goods and service, i.e. UK export expenditure (X)

An economy is in equilibrium when the rate of injections = the rate of withdrawals from the circular flow.