Economics AS · The Macroeconomy. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.
The circular flow shows how money moves around an economy. Households supply factors of production to firms and receive incomes (wages, rent, interest and profit). They spend these incomes on the goods and services that firms produce.
Leakages (withdrawals) take money out of the flow: saving, taxation and spending on imports. Injections add money to the flow: investment, government spending and exports. A closed economy has no foreign trade. An open economy includes the international economy, so it has exports and imports.
National income is in equilibrium when total planned injections equal total planned leakages. If injections are greater, income rises. If leakages are greater, income falls.
Students say equilibrium needs S = I, T = G and M = X separately. Only the totals must match, so a budget deficit can be balanced by, for example, high saving.
Answer: National income will fall until leakages have fallen to equal injections.
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