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Leakage

Updated on February 6, 2025 , 3647 views

What is Leakage?

Leakage is a term in Economics which refers to Capital or Income that diverges from an iterative system. In economics, it is usually used in relation to a particular depiction of the flow of income within a system. This flow is also known as the circular flow of income and expenditure in the Keynesian model of economics. Under this, leakages refer to not consuming uses of income, like saving, Taxes and imports.

Leakage

This particular Keynesian model of income flow is depicted in the form of a circle. The elements include national income, Consumption, output and Factor payments. Non-consumption uses of income like savings, taxes and imports are leaked out of the main flow. This reduces the money available throughout the Economy.

Furthermore, the Keynesian economics theory mentions that a leakage causes capital shortage and the government might have to take steps to pump their economy by injecting leakage into the system. The fund injection can be achieved if the export to foreign countries is increased. It can also be achieved by borrowing funds from foreign governments for investors.

What are Imported Goods?

Imported goods refer to goods that are transferred from one country to another country. Imported goods are also sometimes called leakage because they can have an impact on transferring income earned in one country to another country.

The funds used to buy the imports have an immediate effect which results in an outflow from the domestic area. In the retail sector, the term leakage is used to refer to a customer who spends money outside his local Market. This can sometimes be a challenge for businesses within this kind of economy.

Important Points about Leakage

Leakage can also be a Call in case of transnational corporations (TNCs). Big companies also possess factories or other production facilities in foreign countries. These factories help generate wealth for the company e which is then not transferred to the economy of the host country but to the economy of the corporation involved. The Economic Value is then lost on profits here. This is called leakage in this case.

Leakage in Tourism

Leakage can also occur when it comes to tourism. This happens through funds transitioning between those who live in an area and chose and tourist destinations. Other than that businesses that have facilities in a particular area and also hold headquarters and other areas can create leakage. This is because funds are moved to the headquarters location.

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