A bathtub analogy is useful in illustrating the injections-leakages approach to equilibrium real domestic output and income (real GDP) in the private, closed economy. A tub’s faucet enables an inflow of water and the tub’s drain allows an outflow of water. Any particular level of water in the tub remains constant when the inflow from the faucet equals the outflow from the drain. If the inflow exceeds the outflow, the level of water rises. If the inflow is less than the outflow, the level of water level recedes. The inflow, outflow, and level of water in the tub are analogous to investment (Ig), saving (S), and real GDP, respectively, in a private, closed economy. Equilibrium real GDP occurs where the investment injection (inflow) just equals the saving leakage (drain). If the investment injection exceeds the saving leakage, real GDP expands until saving increases sufficiently to equal the level of investment. If the investment injection is less than the saving leakage, real GDP declines until saving falls sufficiently to equal investment. In both cases equilibrium is achieved where investment equals saving. In the economy represented in Table 9-4, equilibrium real GDP is $470 billion. In view of the bathtub analogy, it is not surprising to discover that investment and saving flows are each $20 billion.

Photograph courtesy of: (c)Corbis # IEX0048;