IS excess saving is a virtue or a vice ?

Hi Readers

Here I am trying to explorethe implications of excess saving. Generally our perceptions are like individual saving will result in better standard of living in future, means thriftness will help in improve saving thus better life in future. Tha anmoly arises because of paradox of saving/ thriftness as I will explain in detail in subsequent lines.

As we know by IS / goods equilbrium

Total output  ( Y ) = Expected Demand ( Z )..................Goods market equilbrium

Thus  Y = C + I + G (In case of close economy)

Y = [ Co + c (Y - T)  ] + G + I

Total saving = Private saving + Public saving

Private saving   S = ( Y - C - T)  = G + I + T.............and we know all the 3 factors are independent of thriftness. So overall private saving does not change.

But Y = [ Co + c (Y - T) ] + G + I  decreased.


Classical Model

In classical model we assume Y is constant as in long run, economy is producing at full employment level .

So Total Saving  S = Y - C - G and here due to thriftness C decreased but Y is constant, thus overall saving decreaeses. This is paradox of Saving.

So thriftness can lead to decrease or unchanged Saving.

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