This model is a simplistic version, as it assumes all households income is spent on goods or services. It doesn't take into account the economic affects of the government, the finance sector and the foreign trade. Using just households and firms does not show us the leakages and injections into/out of the flow (our economy).
To make the model slightly more comprehensive, another sector can be added to the existing sectors of firms and households; the government. The government receives taxes from households through VAT and income tax as well as receiving corporate tax from the firms. This constitutes a leakage.
Government expenditure to households includes welfare state payments such as benefits, state pension and improving or renovating houses/areas. Firms also benefit from government expenditure, for example through their spending on helping new enterprises start up and survive. Health, transport and education are the other main categories for government expenditure.
Finally, for the complex circular flow of income model to be complete, the finance sector and the foreign trade must be added, alongside firms, households and the government. Previously, it was assumed that households expenditure was to the firms only. However, households save money as well as spend it on imported goods.
As households save some of their income by depositing it in banks for example, leakage from the circular flow occurs as a result. However, the financial market helps to produce injections into the circular flow as well. Banks give loans to firms who use this money to invest in capital goods (capital investment e.g. computers, machinery). Capital investment is an injection into the economy as the money will be used to purchase capital goods that will help to produce more goods and services.
Finally, the last sector in the complex circular flow of income model is the foreign trade. The money from exports being sold overseas will be injected into the circular flow, whilst spending by UK customers and UK based business on imported goods represents a leakage from the economy. This is because the money from the UK households/firms to purchase the goods from abroad flows out of our economy and into the foreign economy and vice versa.
Looking at this model as a whole, it's clear to see that if the withdrawals (imports, savings, tax) are greater than the injections (exports, capital investment, govt spending) the over all income in the circular flow will decrease. Similarly, if the injections are greater than the leakages, the over all income in the circular flow (national income) will increase. This could have an effect on some of the governments main economic objectives by reducing unemployment, helping economic growth occur and rise inflation.
