Which of the following is a leakage' from the circular flow of income ?

Question

Accepted Answer

The correct option is 3: Mukesh imported a brand new car from Japan for 20 lakh.

The circular flow of income model illustrates how money moves continuously between households and firms in an economy. A "leakage" (or withdrawal) is any economic activity that causes money to be diverted *out* of this main flow of income and spending. The three primary leakages are Savings (S), Taxes (T), and Imports (M). Imports represent payments made by domestic households or firms to foreign producers for goods and services. When Mukesh imports a car from Japan, the Rs 20 lakh leaves the domestic circular flow to pay the foreign seller, reducing the aggregate demand within the domestic economy. Therefore, imports are the classic example of a leakage, making this option correct.

The incorrect option is 1: Rakesh bought an Indian made TV for 15,000.
This transaction represents consumption expenditure on a domestically produced good. Money flows directly from the household (Rakesh) to the firm (TV manufacturer) within the domestic economy, thereby sustaining and maintaining the circular flow. This is spending, not a leakage.

The incorrect option is 2: Prakash bought a second hand scooter from his friend.
This transaction involves the exchange of an existing asset and does not represent the purchase of a newly produced good or service. Transactions involving second-hand goods are excluded from the calculation of National Income (GDP) because they involve only a transfer of ownership and no new production; thus, they neither inject nor leak money from the primary flow based on current economic activity.

The incorrect option is 4: Suprateek paid 5,000 to his secretary towards salary.
This payment represents factor income (labor) flowing from a firm/employer (Suprateek) to a household (the secretary) for services rendered. This is the fundamental exchange in the factor market and is precisely what drives the circular flow of income and output within the domestic economy.