Edexcel A-Level Economics A (9EC0) · Theme 2
Specification points
- The circular flow of income; injections and withdrawals.
- Equilibrium levels of real national output.
- The distinction between wealth and income.
The circular flow of income
The circular flow models the movement of income between households and firms. Households supply factors and receive income; they spend it on firms' output. The flow includes:
- Injections — investment (I), government spending (G) and exports (X).
- Withdrawals (leakages) — saving (S), taxation (T) and imports (M).
National income is in equilibrium when injections = withdrawals: I + G + X = S + T + M.
Key definitions
| Term | Definition |
|---|---|
| Injection | Spending added to the circular flow (I, G, X). |
| Withdrawal | Income leaving the circular flow (S, T, M). |
| Income | A flow of earnings over a period of time. |
| Wealth | A stock of assets held at a point in time. |
Equilibrium national income
Real national output settles where planned injections equal planned withdrawals (equivalently, where AD = AS). If injections exceed withdrawals, income rises (via the multiplier); if withdrawals exceed injections, income falls.
Wealth versus income
- Income is a flow — earnings such as wages, interest and profit over time.
- Wealth is a stock — the value of assets owned (property, shares, savings) at a moment.
Rising asset prices raise wealth, which can raise consumption (the wealth effect), even without higher income.
Worked example
A rise in exports (an injection) exceeds any change in withdrawals, so national income rises. Through the multiplier, the final increase in real income is larger than the initial export rise — until higher incomes raise imports and saving, restoring equilibrium.
Common exam mistakes
- Confusing income (a flow) with wealth (a stock).
- Misclassifying injections and withdrawals.
- Forgetting the multiplier when explaining changes in national income.
Exam technique
Use the injections = withdrawals condition to explain equilibrium and how shocks move national income, linking to the multiplier (Theme 2.2).
Quick revision
- Injections: I, G, X. Withdrawals: S, T, M.
- Equilibrium: injections = withdrawals.
- Income = flow; wealth = stock.