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CA Foundation · Business Economics · Determination of National Income

Which of the following is a leakage from the circular flow of income in an open economy with a government sector?

Imports are a leakage. Leakages are saving, taxes and imports, which withdraw income from the domestic spending flow, whereas investment, government expenditure and exports are injections that add to it. Spending on imported goods flows out to foreign producers.

  1. AExports
  2. BGovernment expenditure
  3. CImportsCorrect
  4. DInvestment expenditure

Explanation

Leakages are withdrawals from the domestic spending stream: saving, taxes and imports. Injections are investment, government spending and exports. Hence imports are a leakage, while exports are an injection that adds to domestic income.

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