The lesson
Explain the mechanism, then qualify the outcome. Use this page as a fast, high-quality revision pass—not a wall of notes to memorise.
Leakages and injections
Income flows between households and firms, while government and the foreign sector add more flows. Leakages withdraw spending; injections add it.
- Saving, taxation and imports are leakages.
- Investment, government spending and exports are injections.
- A change in injections or leakages can alter national income and employment.
Closed and open economies
The basic two-sector model is useful, but an open economy includes government and foreign trade. Imports are a leakage from domestic income, not automatically a disadvantage.
- Exports create demand for domestic output and are an injection.
- Higher imports can reduce domestic spending but may improve consumer choice or lower input costs.
- The scale of the multiplier depends on how much additional income is withdrawn through leakages.
Worked exam thinking
Worked example: exports rise
Prompt: Foreign demand for a country’s tourism increases. Trace the circular-flow effect.
How to turn knowledge into marks
Use this answer route
For a focused explanation or short evaluation question on this topic:
- 1Define the core idea precisely.
- 2Explain the chain of cause and effect.
- 3Apply it to the context in the question.
- 4Evaluate a limitation, trade-off or condition.
Quick questions
Check your understanding
Are imports a leakage?
Yes, in the circular-flow model imports are spending on foreign output rather than domestic output.
Are exports an injection?
Yes. They add foreign demand for domestically produced goods and services.
What is the multiplier?
It is the process through which an initial spending change leads to further changes in income and consumption.