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CSEET · Economic and Business Environment · National Income Accounting and Related Concepts

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

Taxes paid by households are a leakage. Leakages are saving, taxes and imports, which withdraw money from the spending stream. Government expenditure, investment and exports are injections because they add spending to the circular flow of income.

  1. AGovernment expenditure on infrastructure
  2. BExport earnings from foreign buyers
  3. CInvestment spending by firms
  4. DTaxes paid by households to the governmentCorrect

Explanation

Leakages are withdrawals of income from the spending stream: saving, taxes and imports. Taxes paid by households reduce the income available for consumption. Government spending, investment and exports are injections that add to the flow, so they are not leakages.

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