Leakage (economics)

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In economics, a leakage is a diversion of funds from some iterative process. For example, in the Keynesian depiction of the circular flow of income and expenditure, leakages are the non-consumption uses of income, including saving, taxes, and imports. In this model, leakages are equal in quantity to injections of spending from outside the flow at the equilibrium aggregate output. The model is best viewed as a circular flow between national income, output, consumption, and factor payments. Savings, taxes, and imports are "leaked" out of the main flow, reducing the money available in the rest of the economy. Imported goods are one way this may happen, transferring money earned in the country to another one. [1]

The simplest possible model of credit creation assumes all loans borrowed from banks in a fractional-reserve banking system are re-deposited to the system. This allows simple calculation of amount of credit created. In practice, though, cash leakages occur in the form of sums of money borrowed from banks but not re-deposited, and in the form of funds deposited in banks but not lent out. Cash leakage, in this case, lowers the ability of credit creation.[2]


  1. ^ "Glossary Leakage". Econplace.com. 2012. Retrieved July 29, 2012. Leakage An outflow from the circular flow of income and expenditure. 
  2. ^ Ngai, J. et al., Economics and You 5, Manhattan, Hong Kong, 2005.