Q.What are 'leakages' and 'injections' in the circular flow of income? Name the three leakages and the three injections, and state the condition for equilibrium of the circular flow.

Leakages are incomes withdrawn from the circular flow, and injections are spending added to it from outside; the flow is in equilibrium when the two are equal.

In the circular flow of income, not all income earned is passed straight back as spending on domestic output, and not all spending comes from households' current income — so the simple circle is modified by leakages and injections.

A leakage (or withdrawal) is any income that is NOT passed on directly as spending on domestically produced goods and services — it flows OUT of the circular flow and reduces it. The three leakages are:

• Saving (S) — income that households set aside rather than spend;
• Taxes (T) — income taken by the government;
• Imports (M) — spending that goes to foreign producers rather than domestic ones.

An injection is any spending added to the circular flow that does NOT arise from households spending their current income — it flows INTO the circular flow and increases it. The three injections are:

• Investment (I) — firms' spending on capital goods, financed through saving;
• Government expenditure (G) — the government's spending on goods, services and transfers;
• Exports (X) — spending by foreigners on domestically produced goods.

The circular flow is in EQUILIBRIUM — with national income neither rising nor falling — when total leakages equal total injections:

$S + T + M = I + G + X$ …

The classic mistake is misclassifying imports and exports — imports are a LEAKAGE (money leaving to pay foreign producers), while exports are an INJECTION (foreign money entering to buy our goods). Reversing these …