Leakage (economics)

In economics, a 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. Imported goods are one way this may happen, transferring money earned in the country to another one. ^[1]

The simple model of credit creation assumes all loans borrowed from banks 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.^[2]

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