Aggregate Savings

[Boojatta]

Suppose your income increases in real terms. (It does not merely increase enough to compensate for inflation. Note that you did not necessarily get an increase in your hourly wage. You might be working extra hours.)

Suppose you save the extra income. Is there any reason to believe that someone else must be saving less so that the total amount of money saved by everybody would not have increased?

Suppose you spend the extra income. If you eventually stop spending that extra income, then would you be violating some rule of economic ethics?

[nick303]

1. Answers

Suppose you save the extra income. Is there any reason to believe that someone else must be saving less so that the total amount of money saved by everybody would not have increased?

Depends on who you mean by everybody, but basically, no.

Suppose you spend the extra income. If you eventually stop spending that extra income, then would you be violating some rule of economic ethics?

No.

[dipsydoodle]

2. deleted

[dipsydoodle]

3. The benefit of the economy

the assumption may well be that you will spend the extra income. That will turn become income for others etc and multiply upwards. This would lead to an increase in tax receipts overall to the State and Government. However - fear of the future due to insecurity may cause people to save their extra income which would have the opposite effect.

My knowledge of economics is over 30 years old but I think I've got that right.

If you want to know more then find something basic on macroeceonomics and the multiplier effect. I just tried without much succes - all looked like Linear B to me.

[Inland]

4. Hm.

Well, Income equals consumption plus saving. That's a tautology for both the individual and the aggregate.

Assuming that income isn't changing and you have a closed system of two people, let's have one person who spends ninety of the dollar he earns, one who earns a dollar and wants to spend a dollar ten. He's building a house. Let's say that you stop spending ninety cents of the dollar you earn and spend the whole thing. That's ten cents you aren't putting in the bank and making available for loans for the only other guy in the economy. His consumption drops. Income of two equals consumption of two plus savings of zero.

If income is increasing in the aggregate, then you can spend a dollar, save the extra income of ten, and put it in the bank, where it's lent. Or save the twenty, put it in the bank, where the huge growth of available money means loans are so cheap, the other guy buys MORE than he planned.

[Boojatta]

5. Creating and owning

Well, Income equals consumption plus saving. That's a tautology for both the individual and the aggregate.

Suppose you own a small piece of land. You build a log cabin on the land, increasing the value of the land. If you have the option of selling it, then is it like a form of savings? However, was it ever income?

[Inland]

6. It is a form of income, and a form of savings.

When the value of assets increase, you can call the increase income. It isn't for tax purposes (because taxes require that income be "realized"), but it is income. If you use a broader term like "savings and investment", as in Income = Consumption + Savings/Investment, it becomes clearer. The dollar value of the investment increases, so does you income. It's a tautology.

[AJH032]

7. Basic Macroeconomic Theory

I don't know if this is what your asking, but maybe this will help: When aggregate savings go up, aggregate expenditure decreases (because consumption decreases). This can be caused by many things, but one thing that you seem to be touching upon is the concept of our "marginal propensity to consume/save." In other words, for every dollar extra of income, how much do you spend, and how much do you save? From a macroeconomic perspective, the more of each dollar each dollar you spend (the higher your marginal propensity to consume), the greater the multiplier effect. This means that if you earn an additional $100 in income and you consume (spend) $80 and save $20, those $80 are added to GDP, but GDP actually ultimately increases much more than that due to this multiplier. If you pay that $80 to a store for a product, it then becomes their income, and they spend/save a portion of it, the spending portion adding more to GDP, and so and so on.

Also, to look at macroeconomic problems, you look at total savings, not individual.