Question

Why is taxation regarded as a leakage and government spending as an injection

Answer 1

In the Injection - Leakage model of expenditure analysis Taxation is regarded as a leakage and government spending as an injection.

One half of the injections-leakages model is injections, which are non-consumption expenditures on aggregate production. The three injections are investment expenditures, government spending, and exports. These are termed injections because they are "injected" into the core circular flow of consumption, production, and income.

The other half of the injections-leakages model is leakages, which are non-consumption uses of the income generated from production. The three leakages are saving, taxes, and imports. These are termed leakages because they are "leaked" out of the core circular flow of consumption, production, and income.

Answer 2

taxation is regarded as a leakage because;

• it is a way of spending money outside the market hence creating a gap between supply and demand .taxes removes income from the economy
• taxation causes a leakage within the closed system of a local market. the consumer or the seller incurs money that goes outside the economy

government spending is regarded as an injection because;

• the government launches projects that brings money to the economy. when the government undertakes a project, they pay labor and raw material hence money is introduced into the system