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Chapter 4

2.2 Circular flow model

Simple economy

Consumption (C)
INDIVIDUALS/ FIRMS/
HOUSEHOLDS COMPANIES
Incomes (Y)

 In equilibrium C = Y

More complex economy

Injections (J) = G + I + X

Consumption (C)
INDIVIDUALS/ FIRMS/
HOUSEHOLDS COMPANIES

Incomes (Y)

Leakages (W) = T + S + M

 In equilibrium, injections = leakages

 If injections > leakages, expect the economy (incomes) to grow – rising inflation,
balance of payments deficit

 If injections < leakages, expect the economy (incomes) to shrink – rising
unemployment, balance of payments surplus

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