Savings and Investment

Savings and Investment:

The other significant concept in this regard is savings. This is directly linked with investment. Saving and investment are the fundamental economic actions of an economy. Saving is predictable for capital formation and economic augmentation. Saving itself has nothing to do with economic expansion unless savings are correctly mobilized and efficiently channelized and invested to improve capital stock to raise production and wealth of the economy. Therefore aggregate investment and savings are equivalent.

However they might not be always in symmetry. The classical economists thought that savings were automatically invested. They notion the decisions to save and decisions to invest were made by similar persons. However Keynes argued that saving and investment were made by various persons for distinct reasons and were influenced by various factors. Therefore, sometimes savings might go beyond investment. Whenever this occurred, there would be insufficiency of aggregate demand and common unemployment.

Keynes thought the gap among S and I could be filled by government intercession either directly by rising government expenses or indirectly by actions persuading the supply of money.

Therefore,

S = I

Therefore,

Y = C + I
Or Y = C + S

 

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