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Factors that can Influence the Circular Flow of Income

In reality the circular flow of income is affected or influenced by many factors that bring about changes in its flow. These are:

(i) Withdrawals and Savings:
These are income but not spent, and this in turn, reduces the amount of income of either the households or the firms e.g. savings is a withdrawal from the economy.

(ii) Investments:
This occurs when money withdrawn from circulation is later put back in form of investments to create additional income in future.

(iii) Grants and Aids:
These have the effect of increasing the income of the recipient, whether they are households or firms, or even the country. The aids and grants are usually given by one government or by other government to an individual.

(iv) Taxes:
This reduces the income available to both individuals and households, thereby reducing their expenditure level. This is also a form of withdrawal from the flow.

(v) Injection:
These are monies not earned, but pumped into the system in order to increase the income of both the households and firms.

(vi) Exports and Imports:
Income earned from the exportation of sales of goods abroad is an injection into the economy, and therefore increases the income of both the individuals and firms. The imports reduce the income as money is used to pay for imported goods.