<P> The five sector model of the circular flow of income is a more realistic representation of the economy . Unlike the two sector model where there are six assumptions the five sector circular flow relaxes all six assumptions . Since the first assumption is relaxed there are three more sectors introduced . </P> <P> In the five sector model, there are leakages and injections </P> <Ul> <Li> Leakage means withdrawal from the flow . When households and firms save part of their incomes it constitutes leakage . They may be in form of savings, tax payments, and imports . Leakages reduce the flow of income . </Li> <Li> Injection means introduction of income into the flow . When households and firms borrow the savings, they constitute injections . Injections increase the flow of income . Injections can take the forms of investment, government spending and exports . As long as leakages are equal to injections, the circular flow of income continues indefinitely . Financial institutions or capital market play the role of intermediaries . This means that income individuals receive from businesses and the goods and services that are sold to them do not count as injections or leakages, as no new money is being introduced to the flow and no money is being taken out of the flow . </Li> </Ul> <Li> Leakage means withdrawal from the flow . When households and firms save part of their incomes it constitutes leakage . They may be in form of savings, tax payments, and imports . Leakages reduce the flow of income . </Li>

3 leakages from the circular flow of income