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The Circular Flow of Income Model


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The Circular flow of income
The model which show how income and resources flow around the economy from households to firms.
Injections
Positive external inflows into the circular flow, namely exports, investment and government spending.
Leakages
Also known as withdrawals, these are negative outflows from the circular flow of income and include savings, taxation and imports.
The marginal propensity to consume
How much of any extra pound injected is re-spent in the economy.
The multiplier
The 'ripple' effect that follows from an injection into the economy - it is determined by the marginal propensity to consume.
Households
The owners of the factors of production, land, labour, capital and enterprise.
The wealth effect
The effect of an increase in value in households' main assets (normally housing but also shares). This will lead to households feeling 'wealthier' and therefore more likely to increase their consumpti
Net withdrawals
Injections - withdrawals.