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In the circular flow of income model, what term describes the injection of funds into an economy resulting from selling goods to other countries?
Imports
Exports
Transfer payments
Government spending
Exports
Exports are considered an injection into the circular flow of income because they represent a demand for domestically produced goods and services by foreign entities, bringing money into the domestic economy. This process increases the total national income, contrasting with withdrawals or leakages like imports, taxes, and savings.
Exports are considered an injection into the circular flow of income because they represent a demand for domestically produced goods and services by foreign entities, bringing money into the domestic economy. This process increases the total national income, contrasting with withdrawals or leakages like imports, taxes, and savings.
The Balance of Payments (BoP) is a crucial macroeconomic indicator defined under the Reserve Bank of India (RBI) Act, 1934, and the FEMA Act, 1999, which tracks all financial transactions between a country and the rest of the world.
Injections are variables that add money into the circular flow of income, including investment, government spending, and exports.
Leakages (or withdrawals) are variables that remove money from the circular flow of income, including savings, taxes, and imports.
The circular flow model demonstrates that in an open economy, Equilibrium occurs when Injections equal Leakages (I + G + X = S + T + M).
Imports are categorized as a leakage because they represent a payment of money out of the domestic economy to foreign producers.
Transfer payments (like pensions or subsidies) are not considered injections because they do not reflect the production of new goods or services; they are merely redistributions of existing income.
Option A is incorrect because imports represent a leakage, not an injection. Options C and D are types of internal fiscal flows or redistributions, not foreign trade injections.
B is correct тАФ Exports represent an injection of foreign currency into the domestic economy, thereby increasing the total circular flow of income.
Link this concept to the Balance of Trade; if Exports exceed Imports, the country maintains a Trade Surplus, which positively impacts the Foreign Exchange Reserves monitored by the RBI.