Circular Flow of Income
Households, firms, government, and the rest of the world, with leakages and injections mapped.
Definition
A map of how spending and income chase each other between households and firms, with government, banks, and foreigners adding injections (G, I, X) and leakages (T, S, M).
Key equation
Injections = Leakages in equilibrium: I + G + X = S + T + M
The intuition
Every dollar you spend is someone's income, which they spend again. The flow only shrinks when dollars leak into savings, taxes, or imports, and only holds steady if injections refill exactly what leaks out.
Exam tip
GDP can be read at three points on the loop, spending, income, output, and all three must give the same number.
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