INJECTIONS-LEAKAGES MODEL: A macroeconomic model that balances non-consumption expenditures on production (injections) and non-consumption uses of income (leakages) that is used to identify the equilibrium level of, and analyze disruptions to, aggregate production and income. The injections-leakages model is based on the principles of Keynesian economics and provides an alternative to the standard aggregate expenditures (Keynesian cross) analysis. The three injections included in the model are investment expenditures, government purchases, and exports. The three leakages included in the model are saving, taxes, and imports. Three variations are the two-sector injections-leakages model (or saving-investment model), three-sector injections-leakages model, and four-sector injections-leakages model.The injections-leakages model provides an alternative to the more common Keynesian cross, aggregate expenditures-aggregate production model of the macroeconomy. Both models provide essentially the same analysis and are essentially "two sides of the same coin." The key difference between the two models is that consumption is explicitly eliminated from the injections-leakages variation. Whereas the Keynesian cross builds on the consumption function, the injections-leakages model builds on the saving function. A Keynesian OverviewKeynesian economics is a theory of macroeconomics developed by John Maynard Keynes based on the proposition that aggregate demand is the primary source of business-cycle instability and the most important cause of recessions. Keynesian economics points to discretionary government policies, especially fiscal policy, as the primary means of stabilizing business cycles and tends to be favored by those on the liberal end of the political spectrum.The basic principles of Keynesian economics were developed by Keynes in his book, The General Theory of Employment, Interest and Money, published in 1936. This work launched the modern study of macroeconomics and served as a guide for both macroeconomic theory and macroeconomic policies for four decades. Injections and LeakagesOne half of the injections-leakages model is injections, which are non-consumption expenditures on aggregate production. The three injections are investment expenditures, government purchases, and exports. These are termed injections because they are "injected" into the core circular flow of consumption, production, and income.The other half of the injections-leakages model is leakages, which are non-consumption uses of the income generated from production. The three leakages are saving, taxes, and imports. These are termed leakages because they are "leaked" out of the core circular flow of consumption, production, and income. Equilibrium in the injections-leakages model relies on a balance between the injections into the core circular flow and leakages out of the flow. If leakages match injections, then the volume of the core circular flow does not change. This is the same as achieving a balance between the water flowing form a faucet into a sink and that flowing out through the drain. When these two flows are equal, then the total amount of water IN the sink does not change. Equilibrium! The Circular Flow
The business sector is at the right and the household sector is at the left. The product markets are at the top and the resource markets are at the bottom. The household sector buys production from the business sector through the product markets. Expenditures by the household sector are consumption expenditures. Revenue going to the business sector is gross domestic product. The business sector hires factor services from the household sector through the resource markets. Payments made by the business sector are factor payments. Income going to the household sector is national income. These four parts -- consumption expenditures, gross domestic product, factor payments, and national income -- are the core of the circular flow. They are the "engine" that drives the macroeconomy. Let's now consider how injections and leakages relate to this core circular flow.
However, if injections exceed leakages, then the volume of the basic flow expands and aggregate production increases. Alternatively, if leakages exceed injections, then the volume of the basic flow contracts and aggregate production decreases. As we shall see, this change in production is what moves the economy to an equilibrium balance. The Injections-Leakages BalanceA balance between injections and leakages generates the same equilibrium as a balance between aggregate expenditures and aggregate production. A little manipulation of the Y = AE equilibrium condition illustrates why.
The Graphical Model
Three VariationsThe injections-leakages model comes in three common variations, each based on a different combination of the four macroeconomic sectors, and thus a different number of injections and leakages.
Check Out These Related Terms... | injections | leakages | injections line | leakages line | saving-investment model | two-sector injections-leakages model | three-sector injections-leakages model | four-sector injections-leakages model | Keynesian model | Or For A Little Background... | Keynesian economics | Keynesian cross | aggregate expenditures | saving line | investment line | effective demand | induced expenditures | autonomous expenditures | macroeconomics | macroeconomic sectors | saving | investment expenditures | government purchases | taxes | imports | exports | And For Further Study... | expansionary fiscal policy | contractionary fiscal policy | automatic stabilizers | Keynesian cross and aggregate market | expenditures multiplier | accelerator principle | paradox of thrift | aggregate market analysis | business cycles | Recommended Citation: INJECTIONS-LEAKAGES MODEL, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: September 15, 2024]. |