Equilibrium, Injections and Leakages
Equilibrium occurs in the economy when total output is equal to the total income. This means that: - Injections are equal to Leakages - There is no tendency for the level of income to change - The system is in balance. Using the circular flow of income model (see 'Circular Flow' topic) and its sectors, we can show the equilibrium by the formula: Savings + Investment + Imports = Investment + Government Spending + Exports. (S + T + M = I + G + X .) However, typically, the state of the economy is disequilibrium. This means that the level of income can fluctuate between growth and contractions. Ironically, disequilibrium is the normal state of the economy as a multitude of factors affect each sector and, in turn, the level of injections and leakages.
When money is withdrawn from the flow income between households and firms, this is known as leakages. The three forms of leakages are Savings, Tax and Imports.
Injections are defined as money that indirectly enters the flow of income between firms and households that increases the flow of income.
Response & Essay Tips
1. A thorough understanding of the circular flow of income model (found in previous topic section) can be very beneficial when both understanding the concept, gaining a visual idea of leakages and injection as well as help build strength to answers in exams. This model can be included in essays and extended responses to help build the impact of your answer. 2. Be sure to know the definitions of equilibrium, leakages and injections. These are 'easy-marks' in the short answer or multiple choice sections!