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Circular flow of income


The reciprocal flow of income between consumers and producers: consumers earn income from employment and profit, and spend this income on the products of firms. If there were neither injections of new purchasing power into this flow nor leakages out of it, total income in each period would be equal to the spending arising from incomes in the period, and total income would remain constant over time. Injections of new purchasing power not derived from income can be made by investment, government spending, or exports. Leakages from the circular flow are caused by saving, payments, or imports. If injections and leakages are equal, incomes will be e constant; if injections exceed leakages, incomes rise over time; and if leakages exceed injections, incomes fall.


Reference: Oxford Press Dictonary of Economics, 5th edt.