Introduction to the circular flow of income
Introduction to the circular flow of income: build the core model, apply it to evidence and qualify conclusions where outcomes depend on context.
9708 section 4.2; AS Level. Checked against Cambridge's 2026–2028 Version 2 (latest version published December 2025) and 2029 Version 1 (published September 2026). Cambridge states that neither version has significant changes affecting teaching. Always follow the syllabus for the candidate's examination year.
Before you begin
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Which set contains only injections in the circular-flow model?
What you will learn
- Trace income flows in closed and open economies
- Classify injections and leakages
- Explain equilibrium and disequilibrium without multiplier calculations
Core model and terms
Households supply factors to firms and receive income; firms sell output to households. Government, financial institutions and the international economy add flows. Saving, taxation and imports are leakages; investment, government spending and exports are injections.
Apply and evaluate
In the simplified model, equilibrium national income occurs when planned injections equal leakages. If injections exceed leakages, income and output tend to rise; if leakages exceed injections, they tend to fall, subject to capacity and other changes. The 9708 AS syllabus does not require multiplier calculations.
Pause and explain
Which statement best applies introduction to the circular flow of income?
Worked example
In an open economy, saving is $24bn, tax is $16bn, imports are $10bn, investment is $20bn, government spending $15bn and exports $18bn. Compare total injections and leakages.
Show the worked solution
- Injections = 20 + 15 + 18 = $53bn
- Leakages = 24 + 16 + 10 = $50bn
- Injections exceed leakages by $3bn
Answer Injections = 20 + 15 + 18 = $53bn → Leakages = 24 + 16 + 10 = $50bn → Injections exceed leakages by $3bn
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Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
In an open economy, saving is $24bn, tax is $16bn, imports are $10bn, investment is $20bn, government spending $15bn and exports $18bn. Compare total injections and leakages.
Give me a hint
Group I, G and X as injections; group S, T and M as leakages.
Compare my reasoning
- Injections = 20 + 15 + 18 = $53bn
- Leakages = 24 + 16 + 10 = $50bn
- Injections exceed leakages by $3bn
Injections = 20 + 15 + 18 = $53bn Leakages = 24 + 16 + 10 = $50bn Injections exceed leakages by $3bn
Look for these in your work
- Injections = 20 + 15 + 18 = $53bn
- Leakages = 24 + 16 + 10 = $50bn
- Injections exceed leakages by $3bn
Why is a household’s spending income for a firm but a receipt for the household?
Give me a hint
Follow the same transaction from each participant’s perspective.
Compare my reasoning
- The household pays for output
- The firm receives sales revenue
- One participant’s expenditure is another participant’s income
The household pays for output The firm receives sales revenue One participant’s expenditure is another participant’s income
Look for these in your work
- The household pays for output
- The firm receives sales revenue
- One participant’s expenditure is another participant’s income
Government raises spending by $2bn while other flows are unchanged. Classify the change and state its initial circular-flow effect.
Give me a hint
Identify whether the flow enters or leaves the spending stream.
Compare my reasoning
- Government spending is an injection
- Injections rise by $2bn
- Planned spending in the circular flow initially increases
Government spending is an injection Injections rise by $2bn Planned spending in the circular flow initially increases
Look for these in your work
- Government spending is an injection
- Injections rise by $2bn
- Planned spending in the circular flow initially increases
Leakages are larger than injections. Explain the direction of disequilibrium adjustment in the simple model.
Give me a hint
Compare spending entering and leaving the flow.
Compare my reasoning
- More income leaves through saving, tax and imports than returns as injections
- Firms face weaker planned sales
- Income and output tend to fall until flows adjust
More income leaves through saving, tax and imports than returns as injections Firms face weaker planned sales Income and output tend to fall until flows adjust
Look for these in your work
- More income leaves through saving, tax and imports than returns as injections
- Firms face weaker planned sales
- Income and output tend to fall until flows adjust
Common mistakes
- Calling all government payments injections or including multiplier calculations that the AS syllabus does not require.
What can you explain now?
Which set contains only injections in the circular-flow model?
Compare with the explanation
Investment, government spending and exports
Each adds planned spending to the domestic income flow.
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Make it stick
Before moving on, explain the central idea in introduction to the circular flow of income and state one condition that could change its effect.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.