The 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.

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 from 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 Three Injections

• Investment Expenditures: The business sector inject investment expenditures into the circular flow. Investment expenditures are used to purchase capital goods like factories and equipment, and while they can be somewhat volatile, they are usually in the range of 10 to 15 percent of aggregate expenditures.


• Government Purchases: The government sector, like the household and business sectors, injects expenditures into the circular flow. The purchases by the government sector on final goods and services produced by the economy is aptly termed government purchases. Government purchases also fall in the range of 10 to 15 percent of total expenditures.


• Exports: The foreign sector, which includes everyone who is not a citizen of the domestic economy, also purchases domestic production. Exports are expenditures injected into the circular flow by the foreign sector and are up to 10 percent of total expenditures.

The Circular Flow

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 relate to this core circular flow.

The three injections -- investment, government purchases, and exports -- can be displayed by clicking the [Injections] button. These injection expenditures, like consumption, are used to purchase aggregate production through the product markets. Most importantly, injections add to the total volume of the basic circular flow. That is, they "inject" revenue into the product markets that is used for factor payments and becomes household income.

Three Sets of Injections

• Two-Sector: The simplest injections-leakages model includes the household and business sectors. Also termed the saving-investment model, the injections side of this variation includes only investment expenditures, with saving the only leakage.


• Three-Sector: The second variation of the injections-leakages model adds the government (or public) sector to the household and business sectors contained in the two-sector model. The injections side of this variation, which is used to analyze government stabilization policies, contains investment expenditures and government purchases, with saving and taxes on the leakages side.


• Four-Sector Model: As the name suggests, all four macroeconomic sectors--household, business, government, and foreign--are included in the four-sector model. This model, which is used to capture the interaction between the domestic economy and the foreign sector, contains investment expenditures, government purchases, and exports as injections, with saving, taxes, and imports on the leakages side.

Three Leakages