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income
because they have provided labour which enables firms to provide goods and 
services. The income earned is used as 
expenditure
on these goods and services that are made.
(a) The 
total sales value
of goods produced should equal the 
total expenditure
on goods, assuming 
that all goods that are produced are also sold.
(b) 
The amount of 
expenditure
should also equal the 
total income
of households, because it is 
households that consume the goods and they must have income to afford to pay for them. 
At this stage we are assuming there are no withdrawals from, or injections into, the circular flow of 
income. 
1.2 Withdrawals and injections into the circular flow of income 
Now we assume that there are withdrawals from the circular flow of income (savings, taxation, import 
expenditure) and injections into the circular flow (investment, government spending, export income). 
Our simplified diagram of the circular flow of income in Figure 1 needs to be amended to allow for these 
two things. 
Be aware that saving is different from investment. Saving simply means withdrawing money from 
circulation. Think of it as cash kept in a money box rather than being put into a bank to earn interest. 
Whereas investment covers expenditure on capital items, such as plant, machinery, roads and houses. 
Income (Y)
Consumption (C)
Saving (S)
Taxation (T)
Import demand (M)
Investment spending (I)
Government spending (G)
Export demand (X)
Households
Financial
sector
Government
sector
Foreign
sector
Firms
Figure 2 Circular flow of income showing withdrawals and injections 
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