The Circular Flow of Income & The Multiplier Effect

The circular flow of income

There are 2 sectors in the model of circular flow of income, which are households and firms. Between these 2 sectors are the flows: income, products and factor services. 

- Income that is not spent on domestic output is said to leak out of the circular flow. There are three leakages: taxes (T), saving (S) and spending on imports (M). Leakages…