Saving and investment equilibrium

Principles of macroeconomics, determination of national income,

1. ARTHADHARE Jyothi s, Assistant Professor, GFGCW, Holenarasipura-573211

2. SAVING AND INVESTMENT EQUILIBRIUM Jyothi s, Assistant Professor, GFGCW, Holenarasipura-573211

3. Introduction: • Previously we have seen how equilibrium level of national income is determined by the interaction of Aggregate demand and aggregate supply. • We can also explains the determination of National Income directly by Saving and Investment.

4. O X Y Z E G C C + I Y = C + S National Income Aggregate Demand and Supply Y 1 Y F Aggregate Demand curve Aggregate Supply curve 45 Figure 1:Determination of National Income

5. • In this figure 1, at the equilibrium level of National Income OY 1 , saving and Investment are equal to GE . Given Aggregate demand curve C+I , the amount of saving at income greater than OY 1 exceeds investment and for income less than OY 1 investment exceeds saving.

6. • It is obvious that saving and investment are equal only at the equilibrium level of National Income and when saving and investment are not equal, the national income will not be equilibrium. • Let us see how National Income is determined by Saving and Investment

7. Determination National Income through Saving and Investment • Saving represents withdrawal of some money from the income stream . On the other hand, investment represents injection of money into the income stream.

8. If investment > Saving, • I f intended investment is greater than intended saving, it means that more money has been put into the income stream than has been taken out of it. As a result, National Income would expand.

9. If Investment < saving, • on the contrary, if investment is less than intended saving , it means that less amount of money has been put into the income stream than has been taken out of it. The result would be that National Income would decrease.

10. Investment = Saving • When investment is just equal to saving, it means that as much money has been put into the income stream as has been taken out of it. As a result, national income will be in equilibrium. • T he equilibrium level of national income will be determined at the level at which the intended investment is equal to intended saving .

11. o Y X E I I S S Y National Income Saving and Investment Figure 2: Determination of National Income

12. • In figure 2, national income is shown along the X-axis. SS is the saving curve which shows intended saving at different levels of income , II curve shows investment demand i.e., intended investment. The II investment curve has been drawn parallel to the X-axis. It implies that investment does not change with income .

13. Contd … • T he savings curve SS and the investment curve II intersect each other at E. OY is the equilibrium level of income. That at the level income less than OY, the amount of intended investment is more than intended savings. As a result, income will increase.

14. Contd … • on the contrary, at the level income greater than OY, the amount of intended investment is less than the intended savings. As a result, income will decrease. The decrease in income will continue until it becomes equal to OY.

15. Algebraically… Y = C +I OR Y = C+ S That is, C + I = C + S Means, S = I

16. Conclusion: • At the level of OY income, intended investment and intended savings are equal, so that there is neither the tendency for income to increase, nor to decrease. Hence, level of national income OY is determined. It is thus clear that national income is determined by investment and saving

17. References: • Macro Economics Theory and Policy: - H.L.Ahuja • Macro Economic Theory: - Mankiw I