What Is Leakage in Economics?
In economics, leakage refers to capital or income that diverges from an iterative economic system. This divergence is often explored through the depiction of the circular flow of income and expenditure, especially in the Keynesian model of economics. Here, leakages represent non-consumption uses of income, such as savings, taxes, and imports, effectively removing money from the active economy.
Key Takeaways
- Leakage in economics refers to the diversion of capital or income from a cyclical economic system.
- It is commonly associated with the circular flow of income and expenditure model in Keynesian economics.
- Imported goods represent major leakage, transferring income earned domestically to foreign economies.
Understanding Leakage
The Keynesian model portrays the flow of income as a circular process involving national income, output, consumption, and factor payments. Non-consumption uses of income—such as savings, taxes, and imports—’leak’ out of this main flow, reducing the available capital in the broader economy.
Leakages can create a shortage of capital, prompting government intervention to stimulate the economy. This intervention may involve injecting funds, which can be sourced from increased exports or borrowing from external entities.
Imported Goods
Titled as a significant source of leakage, imported goods result in the transfer of domestic income to foreign markets. Money spent on imports exits the immediate economy, causing a capital outflow.
In retail, leakage refers to consumers spending their money outside the local market. This poses challenges to local businesses, which must seek alternative revenue sources to sustain themselves.
Credit Creation Systems
Leakage is also crucial in credit creation models, assuming all borrowed funds are re-deposited in the banking system. However, actual scenarios show money being borrowed and not re-deposited or bank funds not being lent out. Such cash leakages diminish the overall ability to create credit.
Transnational Corporations
Leakage occurs in the operations of transnational corporations (TNCs). These corporations may have production facilities in other countries, generating income not injected back into the host country’s economy. In tourism, leakage emerges when funds transition between locals and tourist destinations or when tourism-based businesses transfer funds to operations headquarters located elsewhere.
Information Leakage
Information or data leakage happens when private or confidential internal information is unintentionally or intentionally exposed to the public, whether through improper disclosure or security failures.
Related Terms: Capital Injection, Capital Outflow, Data Breach.
References
- Higher Rock Education. “Leakage (Economics)”.
