explains the relation between saving and investment, and the important
difference between individual saving and aggregate saving.
spending less on consumption than available from one's disposable
What an individual saves can be held in many ways. It can be
a bank, put into a pension fund, used to buy a business, pay down debt,
under the mattress, for example. The common element is the claim
assets that can be used to pay for future consumption. If there
return on the saving in the form of interest, dividend, rent, or
there can be a net gain in individual saving, and thus in individual
Increased Individual Saving
individual decides to increase
saving by consuming less. His cutback in spending necessarily
reduction in income to others. They in turn might cut their
to match the loss of income, but then others would lose income.
people do not reduce consumption equal to the loss of income, so there
usually be a net reduction in saving. Thus the net saving of
else may decrease more than the original increase, which would result
decrease in aggregate saving.
saving does not
increase as a result of individuals acquiring pieces of paper like
or stock and bond certificates. That merely swaps one type of
asset for another without affecting the total. Aggregate saving
when the nation acquires real domestic assets, such as new housing, new
machinery, new factories and offices, additions to a firm’s inventory
or new claims on assets overseas. And that is precisely what is
meant by investment.
is what provides for growth in
aggregate wealth. However we cannot increase investment without
increasing aggregate saving. Measures taken to increase
will not increase aggregate saving unless they increase
Instead they may bring down the income of others, and thereby reduce
saving and investment.
Investment equals aggregate saving, but
it is more revealing to say aggregate
saving equals investment.
For example if investment increases by
10 billion dollars, aggregate saving must have increased by 10 billion
dollars. That means the aggregate income must have increased by
billion dollars more than the increase in aggregate consumption.