2.4.2 Injections and withdrawals

Question 1

Economic agents

Answer 1

• Consumers
• Businesses / Firms
• Governments

Question 2

Circular flow - closed economy

Answer 2

In a closed economy, no injections or withdrawals happen.

Question 3

Examples of closed economies

Answer 3

• North Korea
• Bhutan
• Cuba

Question 4

Withdrawals from circular flow

Answer 4

This is money taken out of the circular flow.

They come in the form of imports, savings and taxes – these withdrawals can be made by households or firms.

Question 5

Injections into circular flow

Answer 5

This is money injected into the circular flow.

Injections into the circular flow of income come in the form of exports, investment and government spending – these go directly to firms and represent new income in the economy.

Question 6

Examples of injections to circular flow

Answer 6

Example of government investment – HS2
- HS2 has created many jobs in construction and the manufacturing supply chain due to an increase in demand for materials.
- As more people are employed as a result of HS2 providing fast high-speed transport, consumers will, on average, have more money, leading to increased consumption.

Example of foreign investment – Newcastle United buyout
- In October 2021, Newcastle United was bought by a Saudi Arabian billionaire for £300m.
- In this example, an extra £300 million is now in the UK economy. This will spread throughout the economy and will help businesses to expand and therefore create jobs. This would decrease unemployment and increases consumption.

Example of foreign investment – Investment in factories
- There is an increase in demand and therefore an increased need for materials leading to more money going into the manufacturing sector.
- This will create extra jobs which workers will receive some training. Even If this company goes under, these workers will have been trained. This is called “upskilling on the workforce”.

Question 7

Examples of withdrawls from circular flow

Answer 7

Example of taxes – Proposed National Insurance increase (2021/2022)
- A tax rise will increase the costs of production for firms. This causes businesses to pay more, meaning a decrease in profit and could mean they have to “decrease labour” by making some staff redundant.
- Those unemployed people would then have less money to spend and therefore will be forced to decrease their consumption.

Example of a withdrawal from circular flow – Natural disasters
- Businesses are “unable to function” due to a (sudden) decrease in labour available.
- However, this can be mitigated through foreign aid and more support is available for businesses. Unfortunately, this can mean that less is being produced locally and this leaves even more people unemployed.

Example of a withdrawal from the circular flow – Foreign aid
- When money is sent to a low-income country (LIC), it leaves the UK government with less money to re-invest back into the UK and some argue it could lead to a tax rise for UK citizens.
- This leads people with less money to spend and therefore consumption decreases.
- However, foreign aid is important for soft power and influence in the area that the aid was given. It could also be the kind thing to do and improve a country’s international reputation.