What is the Bathtub Theorem?

The British economist Kenneth Boulding used to explain many economic phenomena as similar to the accumulation or depletion of water in a bathtub due to a difference in the rate of inflow (injections) and outflow (leakages) of water. Such an explanation of an economic phenomenon popularly came to be termed by economists as the application of the Bathtub Theorem. This approach was supposed to have been used for the first time by Boulding in the 1940s in his book ‘The Economics of Peace’, in which he compared the change in national income to the change of water level in a bathtub; the production rate and consumption rate were similar to the injections and leakages respectively. Accordingly, when production exceeds consumption the national income rises and vice versa. Changes in national income can be explained similarly as arising out of differences in other injections and leakages, for example exports and imports.