The lesson
Use the concept, then apply it to a real decision. Use this page as a fast, high-quality revision pass—not a wall of notes to memorise.
Circular flow essentials
The circular flow tracks income and expenditure between households, firms, government and the foreign sector.
- Saving, taxes and imports are leakages: they withdraw spending from the domestic circular flow.
- Investment, government spending and exports are injections: they add spending.
- Equilibrium can change when injections and leakages change; context matters more than memorising a diagram.
From injection to macro outcome
An initial injection can create further rounds of income and consumption. The multiplier is smaller when leakages are large.
- A rise in exports, investment or government spending can shift aggregate demand right.
- With spare capacity, real GDP and employment can rise.
- Near full capacity, further AD growth is more likely to create demand-pull inflation.
Worked exam thinking
Worked example: export demand rises
Prompt: Foreign demand for a country’s tourism rises. Trace the likely macroeconomic effects.
How to turn knowledge into marks
Use this answer route
For a focused explanation or short evaluation question on this topic:
- 1State the concept or relationship.
- 2Use the diagram, data or example accurately.
- 3Apply the impact to stakeholders.
- 4Evaluate the conditions and trade-offs.
Quick questions
Check your understanding
What is the multiplier?
It is the process by which an initial change in spending creates further changes in income and consumption.
Are imports always bad?
No. Imports are a leakage in the circular-flow model, but they can increase choice, lower costs and support production.
What shifts aggregate demand?
Changes in consumption, investment, government spending or net exports can shift AD.