Savings = Investment

How can savings equal investment?

Saving (S) is equal to your disposable income (YD) minus consumption (C)

S=YD-C so what you don’t consume you save. Where does Your Disposable income come from?

It’s YD=Y-T, total income minus taxes. Perhaps it would have been better to say that savings is equal to income minus¬† taxes minus consumption.

S = Y-T-C

Where would be be without the state? Public saving is equal to taxes (net of transfers) minus government spending, (T-G).

When G>T, government runs a deficit, when G<T, we have a surplus.

Production in a closed equilibrium system is equal to demand, which is the sum of consumption, government expenditure, and investment. (we’re leaving out imports exports for now)

Y = C+I+G

Take taxes from both sides, move consumption to the RHS:

Y-T-C = I + G-T

Now slot in your savings identity, you have

S = I + G-T.

Or

I = S+(T-G),

This says that equilibrium in the goods market requires that investment is equal to saving–the sum of private and public saving.

Imagine an economy with 1 person …

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The Economic Naturalist, Robert H. Frank (book review)

Robert H. Frank of Cornell University wrote a great book called ‘The Economic Naturalist, why economics explains almost everything‘, it has been an absolute winner of a read, and kindly Robert (Bob) took a phone call from me to talk about his book (more on that later).

Regarding the book, it is excellent if you are not actually into economics, because it takes everyday things and tries to use economic foundations for explaining them, the questions are simple every day occurrences and the answers are often surprising!

Here are a few simple examples, ‘why are cans of fizzy drinks round and milk bottles are square’, ‘why do animal rights activists throw paint at women in fur but not bikers in leather’, ‘why do taxi drivers stop working early on rainy days’, ‘why are plane tickets purchased at the last minute more expensive’, and many …

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