Paradox of Thrift

Topics: Macroeconomics, Keynesian economics, Economics Pages: 1 (296 words) Published: February 10, 2013
"Paradox of thrift"
Paradox of thrift is a paradox of economics, popularized by John Maynard Keynes. The paradox states that if everyone tries to save more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. According to this idea, what is wise and prudent for an individual household is disaster for the community as a whole. This paradox can be explained by analyzing the place, and impact, of increased savings in an economy. The Heart of the Paradox: One Man's Spending Is another Man's Income. Imagine a family that decides to save more, in the hopes of providing for a future vacation or the kids' college expenses. So, the family cuts back on how often it eats out at a local restaurant. At first, it might seem that the total saving of the community would rise, but it’s not true. The decision by our [hypothetical] family to not eat out as often forces a reduction in income—indeed destroys the income of the restaurant. This decrease in economic growth means fewer salary increases and perhaps downsizing. So the workers continue to get paid, they continue to consume, the income of the restaurant is lower but the spending of the restaurant and its employees stays the same. So the initial reaction to lower consumption and higher saving by one group in the economy is less income and therefore less saving by another group in the economy. On a graph increased thriftiness can be illustrated as a shift upward of the savings function. If you draw in these shifted lines, you will see that equilibrium income will fall. S is saving, Y is income I is investment
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Paradox of Thrift Essay
  • Paradox Essay
  • Paradox Essay
  • paradox Essay
  • Abilene Paradox Essay
  • Essay on Zenos PAradox
  • The Paradox of Community Essay
  • Bertrand Paradox Essay

Become a StudyMode Member

Sign Up - It's Free