Leakages and injections have a great influence on economic activity, as they basically are economic activity. Without leakages and injections there would be no circular flow, without which the economy would run as it does now. The government also plays a major role in the running of the economy as it has a great influence over what goes in and out of the circular flow by the way of taxation, imports and exports.
The five-sector circular flow of income model is a theoretical way for economists to describe certain features of economic activity and the linkages between the main sectors.
The circular flow model separates the economy into five sectors, a sector being a segment of the economy where the participants engage in a similar type of economic activity. The Australian economy has five main sectors: individuals, businesses, financial institutions, international trade and the government.
The first and possibly most important sector is the individuals. It is concerned with the people's spending of income on goods and services. The economy would not operate as such without individuals as it is they who supply factors of production such as labour and business enterprise, which is used to produce goods and services.
Business is another key sector consisting of firms engaged in producing and distributing goods and services. It is they who rely on individuals to supply the resources needed for the production process, as well as the consumption of goods and services.
Financial institutions engage in the borrowing and lending of money including: credit unions, superannuating funds, building societies, life insurance companies and banks. These institutions are required for people and businesses to save and invest.
Savings are considered a leakage from the circular flow, as it is money that has been taken out from the flow. This results in a reduction in economic activity. When a person puts their income aside as savings, the balance of equilibrium...
Please join StudyMode to read the full document