Leakage

Leakages are certain factors which can reduce levels of aggregate demand, and therefore reduce the national income. Simply put, leakages refer to anything that reduces GDP. Leakages are non-consumption uses of income, and they usually represent the withdrawal of money from the economy. 

In other words, leakage is income that is generated during the process of production, but is diverted out of the circular flow. Leakage also refers to the withdrawal of money from a circular flow of income. 

Leakage explained

In Keynesian model of economics, of the examples of leakages are:

Taxation – The amount of money households and firms must pay to the government, and which the government then imposes as a charge. 

Savings – Income which is not spent on goods and services and is kept. Ultimately, savings are injected back into the economy and people just leave it to themselves. 

Imports – The goods and services that are purchased by external economies. 

In case, when leakage leads to a capital shortage, the government can change this situation by injecting cash into their systems. This is something that the theory of Keynesian economics implies. This sort of injection of capital is achieved through borrowing funds from either different governments or investors, which consequently increases export levels to foreign states. 

Imported goods

Since imported goods can sometimes affect the transfer of income that was earned from one certain country to another, imported goods can also be referred to as a source of “leakage”. The capital used to purchase the imported goods leaves the immediate area, which leads to an outflow from the territory of a certain country. 

In the retail sector this term is used when referring to a customer who spends his/her money outside their local market. Businesses within this type of economy have no choice but to search for other sources of income.  

Another situation

A model of credit creation is another different situation where leakage is relevant. The model of creation assumes that loans lended from the bank are re-deposited into the system. Although this could never happen in real life, it makes the calculation of the credit amount possible.

Leakages do happen when the money borrowed from the bank is not redeposited. If funds deposited in banks were not lent out, cash leakages could also occur, which in turn, lowers credit creation ability.

Transnational corporations

Leakage in transnational corporations (TNCs) happens when large companies have factories in other countries, and these factories create profits for the company. However, these profits are not transferred to the economy of the host states. Instead, it goes to the corporation involved. Leakage happens because the profits and the value of the economic goods are lost. 

Data leakage is the unauthorized transmission of data from an organization to a recipient outside the organization through whatever medium. In data science, data leakage refers to a mistaken testing of a machine learning model, in which information has been accidentally shared between the test and the training set.