What is a ‘Leakage’

Leakage is a situation in which capital, or income, exits an economy or system rather than remaining within it. In economics, leakage refers to outflow from a circular flow of income model. In a two-sector model exhibiting a circular flow, all individual income is sent back to employers when goods and services are purchased, and back to employees through wages and dividends, creating a system without leakage.

Explaining ‘Leakage’

The exit of money from the economy through leakage results in a gap in supply and demand. Leakage occurs when income is taken out through taxes, savings and imports. In retail, leakage refers to consumers who spend money outside of the local market.

Sources of Leakage

Income can leak out of closed systems through a variety of events and mechanisms. Tourism can cause leakage through funds transitioning between those who live in a particular area and chosen tourist destinations. Additionally, tourism-based businesses who have facilities in one area, but hold their headquarters in another, may create leakage as funds are shifted to the headquarters location.

Compensation for Leakage

In Keynesian economics, governments may have to inject cash into the system if leakage causes a shortage of capital. This injection of funds can occur by increasing the level of exports to foreign nations as well as through borrowing funds from investors or foreign governments.

Information Leakage

In regards to information or data, leakage occurs when internal information that was intended to remain private or confidential in nature is released to the public. This can include the accidental or intentional disclosure of information, or the failure to secure the information allowing for incidental exposure.

Further Reading