Level of Overall

Economic Activity
Chapter 8.1 - Tragakes

Learning outcome:
Describe, using diagrams, the circular flow of income
between households and firms in a closed and open
economy.
Identify the four factors of production and their
respective payments and explain these constitute the
income flow in the model.
Outline that the income flow in a closed economy is
numerically equivalent to the expenditure flow.
Describe, using a diagram, the leakages and injections
into the Circular Flow in an open economy.

Circular Flow
Inside a closed Economy,
the circular Flow illustrates
the value of all outputs
produced in an Economy in
1 year is equal to the total
income generated in
producing that output.
https://jchen3046.files.wordpress.com/2010/07/flow-chart1.jpg

Circular Flow - Open Economy

In an open economy, there are leakages and
injections.
Leakages are the resources that leaves the
circular flow model.
Injections are the resources that are
reintroduced into the circular flow.

Leakages & Injections

Leakages and Injections are paired together.
Leakages

Where

Injection

Savings

Financial Institutions

Investment

Taxes

Government

Government Spending

Import Spending

Trade

Export Earnings

Leakages & Injections

Depending on the size of the leakages and
injections the Circular (Income) Flow will either
remain the same, get bigger, or get smaller.
1. Leakages = Injections: Income Flow the same.
2. Leakages > Injections: Income Flow is smaller.
3. Leakages < Injections: Income Flow is larger.