David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

15.4 National income accounting
Saving
- Household spending on
goods and services = £5000
Goods and services
for households
= £2000 Capital goods
=
i " for firms
1 +
Households l -
Firms
Investment
spending
£2000
Factor services
of production
Factor incomes
= £7000
The inner loop continues to show flows of real resources between firms and households. Firms use factor
services supplied by households to make consumer goods and services for households and new capital
goods for other firms. The outer loop continues to show payment flows. Factor incomes are either saved by
households or spent on consumer goods. Firms also earn revenue from expenditure on new capital goods
by other firms. Thus, saving is a leakage from the circular flow of payments, investment an injection into the
circular flow.
Figure 15.5
Investment, saving and the circular flow
The numbers in Table 15.2 relate to flows of output, expenditure and income in a
particular period, such as a year. During this period the economy goes once round
the inner and outer loops of Figure 15.5. On the inner loop, firms make an output
of £5000 for consumption by households and an output of £2000 of capital goods
for investment by firms. On the outer loop, which relates to money payments,
saving is a leakage of £2000 from the circular flow and investment spending by
firms on new machinery is an injection of £2000 to the circular flow.
A leakage from the circular
flow is money no longer recycled
from households to firms.
An iniection is money that
flows to firms without being
recycled through households.
Two questions immediately arise. First, is it coincidental that household savings of £2000 exactly equal
investment expenditure of £2000 by firms? Second, if not, how is the money saved by households transferred
to firms to allow them to pay for investment spending?
Suppose Y denotes GDP, which also equals the value of household incomes, C denotes household spending
on consumption, and S saving. By definition, saving is unspent income, so Y = C + S, where the symbol =
means