1. Income = Expenditures (on domestic production)
INJECTIONS – LEAKAGES (OR WITHDRAWALS) APPROACH TO THE DETERMINATION OF EQUILIBRIUM LEVEL OF INCOME
According to income –expenditure approach an economy will be in equilibrium only if
Income = Expenditures (on domestic production)
This was algebraically expressed as:
Y = C + I + G + X
Income Expenditure (AD)

2. INJECTIONS – LEAKAGES (OR WITHDRAWALS) APPROACH (Cont’d)
In this approach; disequilibrium arises where Y > or < C + I + G + X. Then Y will adjust passively until Y = C + I+ G + X.
However; the condition for equilibrium given by Y = C + I + G + X also implies S + T + M = I + G + E
S: Private savings
T: Tax revenues
M: Imports
I: Private investment
G: Government spending
E: Export

3. LEAKAGES AND INJECTIONS
S + T + M  Leakages (or withdrawals) from the spending stream of the economy.
I + G + E  Injections

4. LEAKAGES AND INJECTIONS (CONT’D)
To see that if Y = C + I + G + X, then
S + T + M = I + G + E
Substitute in the above equation for Y,
Y = C + S + T and X = E – M
 C + S + T = C + I + G + E – M
 S + T + M = I + G + E

5. EQUILIBRIUM So when the economy is in equilibrium,
Total leakages = Total injections
If S + T + M > I + G + E
<
Then the economy will in disequilibrium and Y will change until the equality is obtained.

6. Remember that:
S = f(Y)
T = f(Y)
M = f(Y)
S S
So as Y T and as Y  T
M M
However I, G and E are all autonomous of Y.

7. There are some interesting insights that one can obtain by analyzing the equilibrium condition be given by:
S + T + M = I + G + E
To see this, we rearrange the above condition and rewrite as follows:
M – E = (I – S) + (G – T)
M – E = Trade deficit if M > E
Trade Surplus if M < E
I – S  If I > S we call I – S  Private sector’s resource deficit.
I – S  If I < S we call I – S  Private sector’s resource surplus
G – T  Budget Deficit if G > T (Public sectors’ resource deficit
G – T  budget surplus if G < T (Public sector’s resource surplus)

8. So, in equilibrium
M – E = (I – S) + (G – T)
M – E: External resource deficit (surplus)
(I – S) + (G – T): Internal resource deficit (surplus)

9. TURKEY AS AN EXAMPLE M – E > 0 Turkey has trade deficit.
This means more resources are coming in Turkey through imports than the amount of resources going out of Turkey though exports.
This resource deficit on external account is due to net internal resource deficit of the economy.
In case of Turkey where I is close to S, the main reason for internal resource deficit is high public sector’s resource deficit given by G > T

10. Another way of interpreting this relationship is to see CURRENT ACCOUNT DEFICIT OR SURPLUS (X) as a reflection of the imbalance between national savings and private investment.
National savings = Private savings + Public Savings
Where S= Private Savings
T – G = Public Savings

11. E – M = (S - I) + (T - G) = S + (T - G) – I
E – M = NATIONAL SAVINGS – I
IF E – M > 0 NATIONAL SAVINGS > I
IF E – M < 0 NATIONAL SAVINGS < I