• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

Penpoin.

Better Knowledge. Your Insight Is Sharper

  • Business
    • Business and Strategy
    • Marketing
    • Operation
    • Human Resources
  • Finance
    • Financial Analysis
    • Investment
  • Economics
    • Introduction to Economics
    • Microeconomics
    • Macroeconomics
  • Online Learning
    • Coursera
    • Udacity
    • Udemy
    • Skillshare
    • Magoosh
  • Reading List
    • Self-Help
    • Business and Money
You are here: Home / Macroeconomics / Three Injections In The Economy

Three Injections In The Economy

Updated on January 22, 2023 by Ahmad Nasrudin

Three Injections In The Economy

Investment, government spending, and exports are three injections in the economy. They contribute to increasing the demand for goods and services in the economy and, therefore, stimulate more job and income creation.

What is injection? An injection is putting funds into the economy or, specifically, into a circular flow of income diagram. So, if we count how much is being injected into the economy, we add up investment, government spending, and exports.

What is a circular flow of income? It is an economic model to describe how goods, services, and money flow among four economic actors: households, businesses, government, and external. Its simplest model only uses households and businesses as representations.

Injections are essential to increase the income flowing in the economy. For example, when a business invests, it’s an injection. Their investment creates more goods and services, jobs, and household income. An increase in income drives more demand for goods and services, which in turn creates more jobs and income.

Then, leakage is a term related to the injection. Leakage represents the withdrawal from a circular flow of income. Three examples are taxes, imports, and savings. When withdrawn, less funds flow in a circular stream. All three are paired together with government spending, exports and investment. Thus, the leakage from the circular flow can enter again as an injection.

  • Government spending vs. Tax
  • Export vs. Import
  • Investment vs. Savings

Why is injection important in the economy?

An injection is important in influencing economic growth. It will increase GDP by adding funds to the economy to recirculate. And an increase in GDP indicates a growing economy where output increases. It also creates more job and income opportunities.

However, we must compare injection with leakage to measure the final outcome on the economy. When injection exceeds leakage, net funds go into the circular flow. That contributes to increased output and economic growth.

But conversely, if the injection is less than the leakage, more funds are going out than coming in. This situation leads to a shrinking output and a contraction in growth.

What are the three injections in economics?

Economists describe three types of injection, including:

  1. Investment
  2. Government spending
  3. Export

Investment

Investment is spending by the business sector for capital goods. For example, when businesses invest, they spend money on production machinery and equipment. Or they build a new factory.

Therefore, when businesses invest, we expect their output to increase. In addition, we also hope they recruit more workers, lowering unemployment. This situation ultimately leads to more income being created in the economy.

Investment is an injection because it injects income into the economy by creating new capital or replacing existing capital, encouraging more output, jobs, and income.

Where does the business get funds for investment? There are two sources: internal capital and external capital. Internal capital comes from retained earnings, which are profits the company decides not to distribute as dividends. Instead, they keep those profits as internal capital to support future growth.

Meanwhile, external sources come from several sources. First, a business might borrow from a bank. Second, they sell shares to the public through an initial public offering (IPO). Third, they borrow from the public by issuing bonds.

How is investment related to saving? Households save their income in addition to what is spent. For example, they put it in a time deposit. Banks then channel their money as loans. Investment loans to businesses are among them.

In addition, households may also buy securities issued by companies. For example, they buy stocks or corporate bonds. Ultimately, household savings flow into businesses. While businesses use the funds collected from issuing securities for investment, households receive dividends, capital gains, or coupons as a return.

But, unlike investment, savings represent leakage because the income is not spent on buying goods and services. Instead, it flows out of a circular flow of income. Therefore, an increase in savings does not contribute to creating more demand for goods and services. 

Then, when households place their savings in the domestic financial market, it is reinjected into the circular flow as an investment. So, savings can be an injection if it is funneled back in a circular flow through financial markets and used for investment.

Government spending

Government spending is an injection because it is spent on goods and services to provide public services such as education, health, defense, and infrastructure. As a result, increased government spending creates more demand for goods and services. As a result, businesses responded by increasing output and hiring more workers.

How is government spending financed? The government relies on taxes to finance its spending. Unlike government spending, taxes represent leakage. It is withdrawn from the economy because it is not spent on goods and services. However, when the government uses taxes to finance expenditures, these expenditures flow back into the circular flow as injections.

Export

Exports flow income into the domestic economy from selling goods and services abroad. When businesses sell their products overseas, they derive revenue from foreign buyers. Money is injected from the destination country into the domestic economy. The business then uses the export earnings to finance operations, investments, dividends, and profits.

Meanwhile, imports work in reverse with exports. Imports represent leakage as money flows from the domestic economy abroad to pay for the foreign products we buy. There is less money at home and, therefore, less to circulate in the economy to create more output.

How do injections affect the economy?

Injection and leakage work in reverse. Likewise, both have opposite impacts on the domestic economy. Injection contributes to creating more output and income for the domestic economy. This is because increased injection increases GDP and multiplier value. The opposite effect applies when leakage increases. Thus, the overall impact on the economy depends on how significant the injection is compared to the leakage.

In the real world, the injection may be larger or smaller than the leak. And that has significant consequences for circular flows and output within the economy.

Injection exceeds leakage

The injection is more significant than the leakage resulting in a more significant circular flow. GDP increases. Likewise, more jobs and income are created.

Take government spending and taxes as an example. Injection exceeds leakage when government spending is greater than taxes, ceteris paribus. Consequently, more goods and services are demanded than are spent on paying taxes.

Assume government spending is $100. Meanwhile, the tax is $90, which is assumed to come only from the household. Households cannot spend $90 on goods and services because they have to use it to pay taxes. So instead, the government spends $100 to buy goods and services. As a result, a net of $10 ($100 – $90) is spent on goods and services in the economy. This net $10 creates a multiplier in the economy as it stimulates businesses to increase production to fill it.

In other examples, exports exceed imports. The circular flow increases because the injection is greater than the leakage. For example, when the domestic economy exports $200 and imports $140, an additional $60 of revenue ($200 – $140) flows into the domestic economy. Finally, GDP increases by $60, ceteris paribus.

  • GDP = Household consumption + Business investment + Government spending + (Exports – Imports)

Less injection than leakage

The size of the circular flow will decrease when the leakage is greater than the injection. For example, imports are higher than exports. Because imports exceed exports, more income is spent on foreign products than flows in from abroad. As a result, on a net basis, less income flows into the domestic economy to be spent on goods and services.

Take saving and investing as another example. Leakage exceeds injection when savings exceed investment. Thus, more savings do not flow back into the economy as an investment. As a result, businesses buy fewer capital goods and reduce their production. They also buy less labor, resulting in an increase in unemployment and a decrease in household income. Finally, this situation leads to a decline in output, employment, and income in the economy.

What to read next

  • What is economic activity?
  • Injections and Leakages in the Circular Flow of Income: Examples and Impacts
  • Three Injections In The Economy
  • Circular Flow of Income: Types and Descriptions

Topic: Aggregate Demand, Aggregate Output, Circular Flow of Income, Injection, Leakage Category: Macroeconomics

AFFILIATE

If you click on this link, thank you for contributing to us. We may earn a commission when you buy through our links. Learn more ›

5 NEW ARTICLES

How to Handle and Resolve Stakeholder Conflicts

How to Handle and Resolve Stakeholder Conflicts

Stakeholders have different interests and goals, which are often contradictory. Stakeholder

What are the Benefits of International Trade

What are the Benefits of International Trade?

Increased access to cheaper and more varied goods and services is key benefits of international

Where Do Comparative Advantages Come From

Where Do Comparative Advantages Come From?

The comparative advantage stems from the ability to produce goods and services at low opportunity

What is the Capital Budgeting Process

What is the Capital Budgeting Process?

In simple terms, the capital budgeting process involves generating ideas, making proposals about

Autarky Examples, Pros, and Cons

Autarky: Examples, Pros, and Cons

What's it: Autarky is a system or philosophy in which an economy seeks to

Primary Sidebar

  • "Becoming Supernatural" by Joe Dispenza
    "Becoming Supernatural" by Joe Dispenza
  • "Thinking, Fast and Slow" by Daniel Kahneman
    "Thinking, Fast and Slow" by Daniel Kahneman
  • "All About Love" by Bell Hooks
    "All About Love" by Bell Hooks

Footer

5 TRENDING ARTICLES

  • Business Size: Definition, Measurement, Classification
  • Socio-cultural Factors: Examples and How They Impact Business
  • The Role of Business in Society and the Economy
  • List of Examples of Social Enterprises You May Be Familiar
  • Trade Restriction: Reasons, Types, and Impacts

EXPLORE MORE

CATEGORIES

Accounting and Finance Books Business and Strategy Financial Analysis Human Resources Investment Macroeconomics Marketing Microeconomics Operation

TOPICS

Aggregate Demand Business Management Demand Financial Analysis Financial Ratio Government Budget International Trade Leadership Macroeconomic Equilibrium Marketing Marketing Management Organizational Structure Profitability Ratio

Copyright © 2023 · About Us  · Privacy Policy and Disclaimer  ·  Affiliate Disclaimer  ·  Terms of Use  ·  Comment Policy  ·  Contact Us