The circular flow of income: money one way, goods and factors the other.
The points to remember
- Money flows one way; goods, services and factor services flow the other.
- Income, output and spending are three ways of measuring the same flow.
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Three more sectors take money out of the flow and put it back in.
Three pairs
| Sector | Leakage (leaves the flow) | Injection (comes back in) |
|---|---|---|
| Banks and the financial sector | Saving (S) | Investment (I) |
| Government | Tax (T) | Government spending (G) |
| Foreign sector | Imports (M) | Exports (X) |
The points to remember
- Injections bigger than leakages: the flow grows.
- Leakages bigger than injections: the flow shrinks.
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Paper 2 asked this in November 2023, for 4 marks; May 2026 asked it about government spending.
More people can now borrow small sums through microfinance.
Using a circular flow of income diagram, explain the impact increased microfinance could have on the economy.
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See the answer broken into clear points, with guidance on how each point earns marks.
Quick reminder
- Two sectors: households and firms.
- Two arrows: households → firms, and firms → households.
- Investment as an injection: an arrow into either flow, or straight into firms or households.
- No numbers, no title needed.
How the 4 marks are given
| Marks | What your answer needs |
|---|---|
| 3–4 | A correct diagram and a correct explanation |
| 1–2 | A correct diagram or a correct explanation, not both |
| 3 at most | A diagram with a wrong or missing label |