The level of national income.

resources they need and individuals depend on businesses to satisfy the good and services they require as well as to provide an income for them to purchase with. With this income households save a part of their money in financial institutions which go on to lend them to businesses for investment purposes. This act of savings is considered a leakage from the circular flow as the money is put aside and withdrawn from the circular flow of income. The leakage then leads to a reduction of economic activity as well as upsetting the state of equilibrium in the economy. Left on its own, the leakage will progressively reduce the size of the circular flow of income until it would cease to exist. This causes the economy to be faced with a fall in demand of resources, a fall in demand in come to the owners of these resources, a fall in production and a fall in expenditure on goods and services. This leads to a rising rate of unemployment and reduces the standard of living to bery low. Another form of leakage is taxation. This is obtained by the government by taxing other sectors in the economy. When an individual pays tax this reduces the amount of money they have to spend on goods and services. Similiarly when a government taxes a business it reduces the level of funds available to pay for the resources. This leakage too, would cause a lower level of reduction in economic activity therefore causing income, output and employment opportunities to fall. However, leakages can be balanced out through investments, which is an injection and has the opposite effect of a leakage. Therefore it is recommended to spend on investments, as it would lead to a rise in expenditure, production, employment and income levels in the economy. Government expenditure also represents an injection for two ways. Firstly, when the government spends revenue on collective goods and services it provides an income to government employess and employess of private businesses from which it purchases its goods and services. Secondly tax revenue is also used to provide an income to individuals through pensions, unemployment benefits etc. This all leads to an increase in expenditure, production, employment and income levels in the economy. The overseas sector shows both leakage’s as well as injections. Payments for imports are regarded as a leakage as the money is withdrawn from the Australian economy and paid to businesses overseas therefore creating an injection in their market. Similarly, lending or paying income overseas is also a form of leakage. On the other hand, payments for exports are considered as an injection because overseas consumers pay the money to Australian businesses and consumers. Similarly, any other flows of income such as foreigners lending, or paying income to Australians would be considered as an injection. Therefore it can be seen that in order to have equilibrium occur we need to have the sum of all leakages equal to the sum of all injections in the economy. Otherwise, disequilibrium occurs. The two possible outcomes to show the possibilities of disequilibrium are as follow:When the total amount of leakages is greater than the total amount of injections. This causes a downturn in the economy meaning a fall in expenditure, production, employment opportunities and income. However, as this occurs consumers will have less income to save, to spend on imports or to have collected as taxes. This will lead to leakages and injections to eventually balance creating equilibrium however at a lower level of income. When the total injections are greater than total leakages. This creates an upturn in the economy as consumers have more income to save, to spend on imports or to have collected as taxes. Therefore leakages ad injections will once again balance itself out to equilibrium at a higher level of income. Therefore, by altering its contributions to leakages and injections, the government has a large degree of influence over the level of economic activity, Therefore, it can be shown that for an economy to benefit, it needs to have a higher national income. This in turn would cause people to have more money in their pockets. This would lead to them to spending more which in turn would create a demand for goods to rise. This causes businesses to increase production, causing them to hire more staff, causing a decrease in unemployment.