Project Docs
Project Docs
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Acknowledgement
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Certificate
<br>Signature of Teacher
Name: [Teacher’s Name]
Designation: Economics
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Introduction
Economics, as a social science, deals with the production,
distribution, and consumption of goods and services. One of its
fundamental concepts at the macroeconomic level is the Circular
Flow of Income, which represents how money moves through an
economy.
In any economy, there are constant interactions between different
sectors—households, firms, the government, and the rest of the
world. These interactions involve the exchange of goods, services,
and payments. The Circular Flow of Income is a visual model
that explains how income circulates in an economy, showing the
relationship between producers and consumers.
This project explores this concept in depth, particularly focusing
on the roles of leakages and injections—the factors that disturb
the smooth flow of income and determine the equilibrium in an
economy. By analyzing these components, one can understand
how economies grow, shrink, or stay in balances
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Index
1. Introduction
3. Types of Economies
5. Participants in an Economy
7. Types of Leakages
8. Types of Injections
13. Conclusion
15.. Bibliography
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Concept of Circular Flow of Income
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● Households
● Firms
● Government
● Foreign Sector (Rest of the World)
Each of these sectors contributes to the flow of income and
expenditure, influencing the economic cycle.
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Participants: Households, Firms, and Government
● Government collects taxes (leakage) and spends on
public goods and services (injection).
● This model reflects a more realistic economy where
fiscal policy influences flow.
3. Four-Sector Economy
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Real and Money Flows
In a circular economy model, two types of flows occur
simultaneously:
1. Real Flow
Movement of actual goods and services.
Example: Labor provided by households, goods produced by
firms.
2. Money Flow
Movement of monetary payments for goods and services or
factor inputs.
Example: Wages paid to households, revenue received by
firms.
These two flows operate in opposite directions and are
interdependent. Without real flows, money flows cannot
exist, and vice versa.
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Participants in an Economy
In a four-sector model, the following economic agents
participate in the circular flow:
1. Households
● Provide factors of production (land, labor, capital,
entrepreneurship).
● Receive income in the form of wages, rent, interest,
and profit.
● Spend income on consumption of goods and services.
2. Firms
● Produce goods and services.
● Hire factors of production from households and pay
them.
● Sell output to households, government, and foreign
buyers.
3. Government
● Collects taxes from households and firms (leakage).
● Spends on infrastructure, education, defense, subsidies,
etc. (injection).
● Influences flow via fiscal policy (taxation and
spending).
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4. Foreign Sector
● Represents trade with the rest of the world.
● Exports bring money into the economy (injection).
● Imports send money out of the economy (leakage).
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Meaning of Leakages and Injections
Examples:
● Savings (S): Income not spent on consumption.
● Taxes (T): Paid to the government, not directly spent.
● Imports (M): Spending on foreign goods/services.
Injections
These are additions to the flow of income, increasing
economic activity.
Examples:
● Investment (I): Business spending on capital goods.
● Government Expenditure (G): Public spending on
goods/services.
● Exports (X): Foreign spending on domestic
goods/services.
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The overall flow is in equilibrium when:
Total Leakages = Total Injections
i.e., S + T + M = I + G + X
1. Savings (S)
● Income that households do not spend on consumption.
● Saved in banks or other financial institutions.
● While savings reduce immediate consumption, they can
be redirected as investment later.
● Example: A household earning ₹50,000 saves ₹10,000
instead of spending it. That ₹10,000 is a leakage.
2. Taxes (T)
● Compulsory payments to the government by
households and firms.
● Reduces disposable income and consumption
expenditure.
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● However, the government may reinject this money
through public spending.
● Example: If you earn ₹1,00,000 and pay ₹20,000 in
taxes, your consumption potential falls—causing a
leakage.
3. Imports (M)
● Spending on foreign goods and services.
● Money leaves the domestic economy and flows to other
countries.
● Example: Buying an iPhone imported from the U.S.
means your money goes abroad, reducing domestic
income flow.
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Types of Injections in the Circular Flow
1. Investment (I)
● Expenditure by businesses on capital goods (machinery,
buildings, etc.)
● Stimulates production and employment.
● Example: A company investing ₹1 crore in a new
factory injects money into the economy by hiring labor,
buying raw materials, etc.
2. Government
Expenditure (G)
● Spending by the government on infrastructure,
education, defense, subsidies, etc.
● Increases demand and boosts income for various
sectors.
● Example: Road construction creates jobs and demand
for materials, injecting funds into multiple industries.
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3. Exports (X)
● Goods and services sold to foreign buyers.
● Brings foreign currency into the country.
● Example: An Indian textile firm exports garments to
Europe and earns foreign exchange, adding to domestic
income.
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Equilibrium and Disequilibrium in the
Circular Flow
● Mathematically,
S+T+M=I+G+X
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● Inflation or deflation
● Unemployment or overproduction
Example:
● If leakages exceed injections, the economy contracts
(recession).
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Importance of Circular Flow Analysis
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Real-Life Examples from India (2024–25)
2. Taxation as a Leakage
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In April 2025, India's merchandise exports reached $38.5
billion, marking a 9.1% year-on-year increase. However,
imports surged by 19% to $64.9 billion, leading to a trade
deficit of $26.4 billion—the highest since November of the
previous year. Exports serve as injections, bringing income
into the economy, while imports are leakages, as they
represent spending on foreign-produced goods and services.
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Visual Representation of Leakages and
Injections
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Conclusion
Flows shown:
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(Insert Diagram titled: "Two-Sector Circular Flow")
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Additional flows:
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Adds the Foreign Sector to the model
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Case Study 1 – MGNREGA as an Injection
in Rural India
●Injection:
The government spends thousands of crores annually under
this scheme.
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●Data Point:
In 2023–24, over ₹90,000 crore was allocated to
MGNREGA, reaching ~10 crore households.
●Background:
India imports over 80% of its crude oil, making it one of the
top oil-importing countries.
●Leakage:
Payments made in foreign currency for imports flow out of
the domestic economy.
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Leads to trade deficits and reduces national income unless
balanced by exports or other injections.
●Data Point:
In FY24, India’s crude oil import bill crossed $170 billion,
widening the current account deficit.
●Background:
Foreign Direct Investment (FDI) involves foreign companies
investing in Indian businesses, infrastructure, and
industries. India has become a major FDI destination due to
its large market, young workforce, and improving business
environment.
●Injection:
FDI brings foreign capital, technology, and employment
into the economy.
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● Example:
Companies like Amazon, Apple, and Samsung have heavily
invested in Indian manufacturing and retail.
●Data Point:
In the first eight months of FY25, India received $55.6
billion in FDI, a 17.9% increase from the previous year.
● Example:
If you buy a product for ₹1,000, and GST is ₹180, that
₹180 goes to the government and not directly back into
business or household consumption.
GST as an Injection
The government uses GST collections to fund
infrastructure, education, subsidies, and public services.
These expenditures are government injections (G) into the
economy.
●Example:
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GST collected from businesses may be spent on building
roads, hospitals, or providing subsidies, which re-injects.
● Scenario:
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The government introduces an Export Promotion Scheme,
offering subsidies and tax rebates to textile exporters.
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Bibliography
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