2.4 National income GapFill

National income refers to the amount of money in an economy over time. We can identify two components of national income. The first, injections, increases the amount of money in the national circular flow. Types of injections are  spending, investment and exportstaxation, savings and importsspending, savings and exportstaxation, investment and imports. The second, leakages, reduces the amount of money in the national circular flow. Types of leakages are:  taxation, investment and importstaxation, savings and importsspending, investment and exportsspending, savings and exports. Injections exceeding leakages can be described as  balance of payments surplusbudget surplusinflationeconomic growth.

In understanding the dynamics of injections and leakages, it is important to distinguish between wealth, which is measured at a single point in time, and is known as a  fallgrowthflowstock, and income, which is measured over a period of time, and is known as a  fallstockgrowthflow. Measuring national income over a period of time, rather than at a single point in time, allows us to capture the effect of injections and leakages in the economy. Injections create   a multiplier effecta monetary expansionan appreciationa marginal propensity to withdraw, meaning that the addition of income into the economy in turn generates further income. Leakages generate   a monetary expansiona multiplier effectan appreciationa marginal propensity to withdraw, meaning that the removal of income from the economy reduces the ability to generate further income. In this sense, leakages can be considered   a marginal propensity to withdrawan appreciationan opportunity costa monetary expansion.

The multiplier effect can be defined as 1  divided bymultiplied bysubtracted fromin addition to the marginal propensity to withdraw.