The circular flow of income shows how money and goods move between households and firms.
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 May 2026, for 4 marks.
The government will spend more on roads and power stations.
Using a circular flow of income diagram, explain how government spending can increase economic growth.
Model answer plan
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.
- Government 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 |