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The operations of the free market may result in an unequal distribution of income and wealth in the economy.

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Economists use income and wealth as indicators of living standards for individuals, households, and the economy as a whole.

The circular flow of income model can be used to explain the free market economy’s ability to achieve equity in the distribution of income and wealth.

Income inequality refers to income being unevenly distributed in a community or country, while wealth inequality is the unequal distribution of fixed assets across the economy.

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Essentially, income inequalities arise because labor and capital resources are compensated differently.

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If the sum of leakages (S + T + M) exceeds the sum of injections (I + G + X), then national income and employment will fall, resulting a recession in the country.

If the total value of imports exceeds that of exports (M > X), the net leakage of income from the economy causes greater inequalities between low-income and high-income countries.