Question

Which best describes why taxes and savings are considered leakage factors?

Answer 1

The economy is made up of C+I+G+X-M where :

C= consumption

I= investment

G= government

X-M= net exports

Money exiting from the economy through leakage results in a demand and supply gap. Leakage occurs when income is removed by taxes, savings and imports.

Since savings are the money we save so the money is not being used for consumption which means its not being injected into the economy classifying it as a leakage. On the other hand taxes are also taken for government use because of this tax money is not used for consumption again classifying it as leakage.

Answer 2

In an economy there are certain factors that effect its GDP. The GDP is made up of some components. Those components being Consumption, Investments, Government spending, net exports.

The formula for this is (C + I + G + X-M )= GDP

The money which exits from the economy through leakage leads to a gap. This is the gap of the demand and supply. There are injectors and leakages, for instance, Leakage occurs when income is removed by taxes, savings and imports. Because there are the spending or outflow factors.

Since savings are the money we save so the money is not being used for consumption which means its not being injected.

Next in line is taxes which are taken in the shape to be used as  government spending because of this tax money is not used for consumption.

Same goes for imports. They go in the form of outflows.