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5

From the Wikipedia article: Economists describe a consumer as "prudent" if he or she saves more when faced with riskier future income. This additional saving is called precautionary saving. For risk averse consumers with thrice differentiable utility $u^{\prime\prime\prime}>0$ is a necessary and sufficient condition for consumers to save more for ...


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What you're describing is a change in the capital account, not in GDP. They're related through the balance of payments, in that if a country is running a current account deficit (usually arising through being a net importer), they'll have a capital account surplus (i.e., foreigners will on net buy more domestic assets or domestic owners will be net sellers ...


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First we must address the nature of savings. Savings are not bad or good per se. It depends on the context. It is true that in the short run, increased savings will lower consumption, thereby lowering GDP. However savings also increase investment, which in the long run increases economic growth. Therefore, the optimal savings rate is found by solving the ...


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The seminal academic criticism of dollar cost averaging on many specifications of economic conditions is A Note on the Suboptimality of Dollar-Cost Averaging as an Investment Policy (Constantinides (1979)). You might also be interested in these papers: Dollar Cost Averaging is an investment system that is widely advocated by brokerage firms and mutual ...


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The Wikipedia article has several different quotations over time, though I would state the claimed paradox as a variant of (2), possibly something like an increase in the rate of saving can lead to lower total savings perhaps illustrated with a graph something like which suggests that the paradox seems to depend on the the combined relationships ...


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It was Alfred Marshall's doing, but based on a premise that still prevails in many parts of Economics: if prices are assumed totally elastic, then, although it may be the case that they are taken as given by the individual buyers or sellers, at market level it is quantity that determines price. So price is indeed the dependent variable, if you care about the ...


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First it should be clear that this is an (ex post) national account equality: $Y=C+I+G+NX$, the private saving is $S_p=Y-C-T$ and public saving is $S_g=T-G$ thus you have $S_p+S_g-I=NX$. Later you see in this book that the net exports, which depend on the exchange rate, are exactly equal to the Net Capital Outflow. Why? because an export is like a capital ...


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Just to add a little more intuition, recall the difference between a small open economy and a closed economy. A closed economy must consume its endowment. A small endowment, however, can borrow and lend from the rest of the world. This allows it to engage in intertemporal trade. When it borrows from the rest of the world, it does so to either increase ...


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Think about the permanent income hypothesis. People's spending is dependent not just on present income, but also the future stream of income. A deflation usually indicates a recession. The central bank is trying to optimize monetary policy subject to a short run Phillip's curve. $$\min_{u, \pi} V(u, \pi) = -(u^2 + \pi^2)$$ such that $$u = u^* + k(\pi^e - \...


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To clarify the first scenario: you assume Joe can buy this car. However, Joe has to either earn an income (and therefore, produce something himself) or he has to dissave. In the first case, Joe has produced 500 output and earned an income of 500. He spends his income on a car, but Amanda saves the money. As is clarified in other answers, Joe's output goes to ...


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Yes, this is very counter-intuitive and confusing. However, there is an interesting explanation involving graphical analysis of demand and supply i.e. why swap axes? . I think, the explanation in that link may offer you some elements of answer.


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I think that part of the blog post is just saying that savings may not equal investment in capital immediately, because there can be a delay caused by firms accumulating inventory. But firms can't continue to accumulate inventory indefinitely, so this is only a transient phenomenon. Sooner or later, inventory will reach a new equilibrium and savings will ...


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At the level of an individual household it can be rational for poverty and savings to coexist. There are degrees of poverty. In terms of food, there is having a somewhat varied and adequate diet but with meat only once a week, there is having a monotonous, entirely vegetarian but adequate diet, and there is going hungry. In terms of education (in a ...


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Your question is essentially about precautionary savings, i.e. the response of savings to risk. What determines precautionary savings is the coefficient of relative prudence: $CRP=-\frac{U'''}{U''}C$, where $U$ is the utility function, $C$ is consumption and primes denote derivatives. As we always have decreasing marginal utility in economics, i.e. $U''<...


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The accounting identity assumes that anything saved is an investment, i.e. something will be done with that saving in the future. It's a bit circular, I know. It's not a lagged model, i.e. there's no explicit indexing by time of the variables, unlike (e.g.) in the Hansen–Samuelson model, which uses discrete time. There are also macroeconomic models with ...


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Tax falls out of the equation. Based on your model, tax can still be in the equation, but it is hidden inside of your $C$ and $G$. First, as you mentioned, if consumption is not constant, then adjusting the tax rate will change $C$ (lower $T$ higher $C$). But the tax rate is also imbued in your $G$- the government must have some budget. In a balanced ...


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What you want is the Flow of Funds (which measures transactions and levels of assets and liabilities), not the National Income and Product Accounts, which primarily measure output and (mostly, though not entirely, physical) capital stock.


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The role of 45 degree line while showing a consumption function is that the 45 degree line translates the values on x-axis to equal values on y-axis. The consumption function is drawn on an income and aggregate expenditure plane. Hence the 45 degree line shows consumption + savings which is aggregate output or aggregate supply or income. The other way to ...


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If household debt rises, it means that more households consume more than they earn. This is the same as saying they save less. This means that the causal channel in your quote is by definition. Now one may ask why do savings decrease in a period of growth. I could imagine two causal channels. It could be that growth is a consequence of low interest rates, ...


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The GDP, as you implied, is represented as follows Y = C + G + I + nX Where Y is the GDP, C and G are private and government consumption, and I is the invest in fixed assets This formula represents the demand for GDP In a closed market I = S since all savings, for a certain amount of real interest r are allocated to investments in projects that would ...


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The paradox is that as people attempt to save more, the total amount of savings decreases. Before I explain how this can be so, we need to understand a couple of things: First of all, when economists talk about savings in aggregate, they consider the full spectrum from at one end saving a lot, through zero savings (quickly spending exactly what you earn) ...


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In simplistic national accounts terms $$Y=C+I+X-M$$ is an expenditure identity while $$Y=C+S$$ is a use of income identity. Implicitly this gives $$S-I=X-M$$ suggesting an excess of saving over investment in an open economy corresponds to a trade surplus in the current account, which in turn corresponds to an outflow in the financial account: the excess ...


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An additional answer would be bequests (Kessler & Masson, 1989; Becker & Tomes, 1994) or actually deriving "utility" from holding wealth, due to some status effect.


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There is a couple of macro theories that incorporate money into the utility function. These theories basically say that demand for money comes only from the fact that people like to hold real balances literally just because. I don't know what level of math you are comfortable with, but here is a set of slides for that: http://www.albany.edu/~bd892/Walsh2.pdf


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You could consider unspent money to be a call option. The set of future investment opportunities is unknown, so if you're optimistic about future opportunities it could be a valuable call option. So saving money can be a profit/preference-maximizing behavior.


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Sometimes economists are bad at drawing graphs. For example, think of a supply and demand graph. Price is on the y axis and quantity is on the x axis, but generally when we derive the curves for competitive markets, we usually say that firms and consumers respond to price to determine what quantity they buy/sell, rather than the other way around. So why ...


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In macroeconomics, investment is the amount of goods(consumer goods or capital goods) produced or purchased per unit time which are not consumed at the present time. In other words, "investment" is the amount of goods saved for future use which is by definition "Savings". (Saving does not necessarily need to be in the form of cash. It can also be in the form ...


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In the basic, closed economy model, you are right that Savings=Investment. The reason for this is because, in this model, growing capital stock is not the only item taken into account in Investment. The other item is inventory accumulation. It's a bit difficult to apply it to your scenarios, but here's a rough attempt: Scenario 1: In this scenario, Joe buys ...


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We need to get cause and effect clear. It is incorrect that "deflation is a result of decreasing prices". In fact, the price level at a given time is determined solely by the preferences of the people (to the extent the society is cooperative, i.e., not coercive.) At a higher price level than the actual one at a given time, there would be more suppliers ...


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Investment is inversely proportional to the interest rate and savings is proportional to the interest rate, but if the quantity of savings increases, investment also increases according to the equation $I = S + T-G+M-X$. You can illustrate this by graphing the demand and supply of loanable funds on a 2-D plane (savings affects the supply of loanable funds), ...


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