‘The Circular. come Economie activity is continuous and consists of a series of flow. The production of goods and services can be seen as a flow of output. In the opposite direction is a flow of spending on these goods and services. These flows can be illustrated by using a simple model of the economy. (a) Real and Money flows Figure 10.1 divides the economy into two sections or sectors made up of households and firms. => roa tow ie aad ‘Labour, land ‘Wages, rent ital emerge ners, prott oo, Firms Fig ion ‘There are two types of flow between these groups: () A real flow. Households own factor services which they hire out to firms. Factor services are then used to manufacture goods and services. (i) A money flow. Households receive payments for their services (income) and use this money to buy the output of firms (Consumption) Figure 10.1 represents a closed system — the same amount of income keeps flowing round the system. In the real world this is not the case.(b) Leakages or withdrawals from the circular flow Figure 10.2 shows a more realistic model of the real world economy. Figure 10.2 shows that some part of the household income will be: ( _Putaside for future spending, i.e saved. i) Paid to the government in taxes. Spent on foreign miade goods imported into the country. Gi (¢) Injections into the circular flow Figure 10.2 shows that some goods will be sold to: other firms, i investment expenditure; the government, ic government expenditure; (ii) foreigners, i.e export expenditure. Hownehoide } LEAKAGES OR WITHDRAWALS oS } Consumption tecomne insections: @o_ ae A 7 Fier Figure 10.4 Leakages and injectionsSaving and investment Savings Household do not spend all their income ~ some of it is saved. Savings, therefore, can be seen as a kind of leakage from the circular flow. They are part of the income paid out by firms which does not come back to them in the form of household spending Investment In addition to the demand from households for consumer goods and services, firms also receive demands for capital goods. These demand come from other firms. In this way some of the savings of houscholds flow back into the system. Savings are placed in banks and other financial institutes which lend the money to firms so that they can buy capital goods. Investment is an addition to or injeetion into the circular flow. ‘The government sector ‘Taxation When the government levies taxes on income and spending, it takes money out of the circular flow. Taxes, therefore, are a withdrawal or leakage from the circular flow of income, Government Spending When the government buys goods and services, it adds income to the circular flow. It creates income when it buys goods and services from firms, As a very large employer if labour, the wages and salaries it pays to it employers add directly to the income of households. Government spending is an injection into the circular flow of income. ‘The foreign trade sector Imports When Brunei residents buy foreign goods and services, income is withdrawn from the circular flow. This spending creates income overseas, and not in Brunei. Imports are leakages from the circular flow. Exports ‘When Brunei’s goods and services are purchased by overseas residents, income is added to the circular flow of income in the UK. Exports act as an injection into the circular flow of income.