Ans : A careful study of the circular flow models will reflect (reveal) that certain flow variables act like injections into the economy while certain others act like withdrawals. WITHDRAWALS (LEAKAGES) : Withdrawals are the amount of money which is withdrawn from or leaked out of the regular economy. Withdrawals reduce the size of circular flows of income and expenditure because it takes away some money from regular economy (and this money does not come back to the circular flows of income and expenditure) which is not available for spending on currently produced goods and services. Withdrawals have negative impact on process of production or process of income generation in economy. Therefore, withdrawals dampen the speed of economic activities and bring down the growth of national income. INJECTIONS (ADDITIONS) : Injections are the amount of money which is added into regular economy. Injections raise the size of circular flows of income and expenditure because it adds some money into regular economy which is additionally available for spending on currently produced goods and services. Injections have positive impact on process of production or process of income generation in economy. Therefore, injections boost the speed of economic activities and bring up the growth of national income.

 

[A] Withdrawal and Injection in a Two –Sector Model : Withdrawal : In a two-sector model, a withdrawal is the amount that is set aside by the households and firms and it is not spent on domestically produced goods and services over a period of time. 

For example, 

-- Households set aside a part of their income as a provision for old age or as a provision against the loss of job. 

-- Firms may also withhold (set aside) a part of their receipts in anticipation of depression. The saving is withdrawal. 

It does not come back to circular flows of income. Therefore, withdrawals reduce the size of circular flow. Injection : On the other hand, in a two –sector model, an injection is the amount that is spent by households and firms in addition to their incomes generated within the regular economy. For Example, -- Households make injection of money when they spend from inherited savings, own hoardings or by borrowings. -- Firms also make injection of money when they spend by borrowing from outside of the model economy. The investment is one type of injection. It adds some money to circular flows of income. Therefore, injections raise the size of circular flow. The withdrawals and injections in a two –sector model are shown in following figure : The lower half of figure shows the withdrawals and injections by the households. And the upper half of figure shows the withdrawals and injections by the firms. 

[B] Withdrawal and Injection in a Three –Sector Model : Withdrawal in the Form of Tax (T) : In a three sector model, taxes are withdrawals. When government imposes direct taxes on households and firms, and also various types of indirect taxes in economy, it will reduce 

-- disposable income and consumption of households, 

-- sales and income of firms, 

-- production and investment in the economy, and 

-- size of the circular flow. 

Injections (G) : 

(a) GOVERNMENT EXPENDITURE : Government expenditure is an injection to the circular flows. Because it adds to the aggregate demand. Here, government purchases factor services from the households and goods and services from the firms. 

(b) TRANSFER PAYMENTS : The transfer payments by the government (e.g. old age pension, unemployment, allowances, subsidies, etc.,) are injection to the circular flows. They add to the income of households who raise demand for consumer goods. 

Net Effect of T and G : Thus, T is withdrawal and G is injection. Net effect of T and G on size of flows depends on whether T and G are equal or not. Budgetary policy of government determines whether tax revenue and government expenditure are equal or not. 

 If government adopts a balanced budget policy, then G = T. 

 If government adopts a deficit budget policy, then G > T. 

 If government adopts a surplus budget policy, then G < T.

The balanced and deficit budget policies indicate injections into economy. So, they expand circular flows. On the other hand, a surplus budget policy indicates withdrawal from the economy. So it reduces size of circular flows. 

[C] Withdrawals and Injections in a Four –Sector Model : Withdrawal in the Form of Import (M) : In case of imports, there is -- inflow of goods and services into the economy, and, -- outflow of money (foreign exchange) in the form of “payment for imports” from the economy. This is the flow of expenditure out of the economy. 

Thus, imports (M) represent withdrawals from the economy. Injections : (a) Exports (X) : In case of exports, there is 

-- outflow of goods and services from the economy, and 

-- inflow of money (foreign exchange) in the form of “receipts from export” into the economy. This is the flow of foreign incomes into the economy. Thus exports (X) represent injections into the economy. 

(b) Export of Manpower (X) : In case of export of manpower, there is 

-- outflow of manpower from the economy, and 

-- inflow of money in the firm of foreign remittances into the economy. This is another flow of foreign income as an injection into the economy. Net Effect of foreign trade i.e. X and M : The effect of foreign trade on magnitude of circular flows depends upon trade balance. Trade balance is defined as X – M. If X > M, inflow of foreign income is greater than outflow of money (expenditure). There is net gain from foreign trade. This increases the magnitude of circular flows. But if X < M, inflow of foreign income is less than outflow of money (expenditure). There is net loss from foreign trade. This reduces the magnitude of circular flows. And If X = M, inflow of foreign income is equal to outflow of money (expenditure). There is no net effect from foreign trade. The magnitude of circular flows remains unchanged. 

OVERALL EFFECT : It is very important to understand and consider the overall impact of all withdrawals such as saving (S), Tax (T) and Import (M) as well as all injections such as Investment (I), Government Expenditure (G) and Exports (X). The flow of national income remains stable and also in equilibrium when the injections are just equal to the withdrawals. Therefore, the equilibrium condition for the size of flow of national income is as under. Total Expenditure (E) = Total Income (Y) C + I + G + X = C + S + T + M OR I + G + X = S + T + M OR All Injections = All Withdrawals OR (I – S) + (G – T) + ( X – M) = 0.

The equilibrium level of income is determined when total withdrawals are equal to total injections. If there is difference between withdrawals and injections, there are fluctuations in the flow of income. 

 If withdrawals are less than injections i.e. if S + T + M < I + G + X, then the expansionary process begins and income level rises in the economy. As a result of this, S , T and M go up. This process continues till the withdrawals once again become equal to injections. 

 If withdrawals are more than injection i.e. if S + T + M > I + G + X, then contractionary process begins and income level falls in the economy. As a result of this, S, T and M come down. This process continues till the withdrawals once again become equal to injections. 

DIFFERENCE BETWEEN WITHDRAWALS AND INJECTIONS : 

1. Withdrawal is the amount of money which is withdrawn from or leaked out of the regular economy. 1. Injection is the amount of money which is added or injected into the regular economy. 

2. It reduces the size of the circular flow of income as it takes away some money from the regular economy 

2. It raises the size of the circular flow of income as it adds some money into the regular economy. 

3. It is not available for spending on currently produced goods and services in economy 

3. It is additionally available for spending on currently produced goods and services in economy 

4. It has negative impact on process of production and generation of income 

4. It has positive impact on process of production and generation of income. 

5. It dampens the speed of economic activities 

5. It boosts the speed of economic activities. 

6. It brings down the growth of national income. 

6. It brings up the growth of national income 

7. Savings, Taxes and Imports are the examples of withdrawals 

7. Investment, Government expenditure and exports are the examples of injections. 

8. Excess of withdrawals over injection create contractionary process in the economy. 

8. Excess of injections over withdrawals create expansionary process in the economy.