How will national income be influenced by leakages in the economy?

Question: How will national income be influenced by leakages in the economy?

In this blog post, we will explore how leakages in the economy affect the national income. Leakages are the withdrawals of income from the circular flow of income and spending. They include savings, taxes and imports. Leakages reduce the amount of money that is available for consumption and investment, which are the main drivers of economic growth and national income. 

To understand how leakages affect national income, we need to look at the relationship between aggregate demand and aggregate supply. Aggregate demand is the total amount of goods and services that consumers, businesses, government and foreigners want to buy at each price level. Aggregate supply is the total amount of goods and services that producers are willing to supply at each price level. National income is the value of the output produced by the economy, which is equal to aggregate demand or aggregate supply in equilibrium.

When leakages increase, aggregate demand decreases, because less money is spent on domestic goods and services. This creates a gap between aggregate demand and aggregate supply, which causes a downward pressure on the price level and output. As a result, national income decreases. Conversely, when leakages decrease, aggregate demand increases, because more money is spent on domestic goods and services. This creates an excess of aggregate demand over aggregate supply, which causes an upward pressure on the price level and output. As a result, national income increases.

Therefore, we can conclude that leakages have a negative impact on national income, because they reduce the level of economic activity and output in the economy. To increase national income, leakages need to be minimized or offset by injections, which are the additions of income to the circular flow of income and spending. They include investment, government spending and exports. Injections increase aggregate demand and stimulate economic growth and national income.