Leakage (economics)
Encyclopedia
In economics
, leakage is the non-consumption uses of income, including saving, taxes, and imports. In the Keynesian injection-leakage or circular flow
model, leakages are combined with injections to identify 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.
The simple model of credit creation
assumes all loans borrowed from bank
s in a fractional-reserve banking
system are re-deposited to the system. This allows simple calculation of amount of credit created. Therefore, in credit creation, cash leakage refers to the sums of money borrowed from banks but not re-deposited. Cash leakage, in this case, lowers the ability of credit creation.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, leakage is the non-consumption uses of income, including saving, taxes, and imports. In the Keynesian injection-leakage or circular flow
Circular flow of income
In economics, the terms circular flow of income or circular flow refer to a simple economic model which describes the reciprocal circulation of income between producers and consumers...
model, leakages are combined with injections to identify 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.
The simple model of credit creation
Money creation
In economics, money creation is the process by which the money supply of a country or a monetary region is increased due to some reason. There are two principal stages of money creation. First, the central bank introduces new money into the economy by purchasing financial assets or lending money...
assumes all loans borrowed from bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s in a fractional-reserve banking
Fractional-reserve banking
Fractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...
system are re-deposited to the system. This allows simple calculation of amount of credit created. Therefore, in credit creation, cash leakage refers to the sums of money borrowed from banks but not re-deposited. Cash leakage, in this case, lowers the ability of credit creation.