MPC is seldom 1 or 100 per cent. It is generally less than 100 per cent. In other words,
∆C / ∆Y < 1.00
∆C < ∆Y
This implies that whole of the income generated is not spent in full on additional consumption. That part of the income which is not spent on consumption is referred to as a leakage from it.
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The following are some important sources of leakage from the multiplier process:
1. Savings:
This is the most common leakage from the circular flow of income and expenditure. In fact, the higher the propensity to save, the smaller the value of the multiplier K = 1/MPS and the slower the income propagation.
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2. Debt Cancellation:
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If increase in income is used by people in paying off old debts, consumption expenditure does not rise. MPC remains unchanged and so do the multiplier and the multiplier process.
3. Taxes:
Whole of the increased income is not spent on consumption because a part of it is used to pay off the enhanced tax liability. Thus tax forms another leakage from income that reduces the consumption expenditure.
4. Inflation:
Due to a price rise, an increase in income fails to bring about a proportionate increase in consumption. Hence inflation is another form of leakage from income.
5. Accumulation of Idle Cash Deposits:
A part of the increased income is retained as idle cash deposits in banks. This again curtails a part of income from being spent on consumption.
6. Purchase of Old Stocks and Securities:
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That part of income which is diverted to the purchase of the old shares from others is neither spent on consumption nor does it lead to any capital formation. It forms another leakage from income.
7. Imports:
A part of increased income is often diverted to the purchase of foreign goods due to which consumption of domestic goods fails to increase in the same proportion in which income has increased. Thus, imports to form a part of the leakage from income.