An interesting paradox called the “Paradox of Thrift
Benjamin Forum (175 Words)
The paradox of thrift to my initial perception does not seem to be a bad thing. It is common knowledge that people in the United States are earning less and less and are not keeping up with current inflation to include my current occupation. Whenever money is saved it is not spent in the economy. For example if somebody makes $10 a month but only spends a total of $7 the money that is not spent does not enter the economy rather it is saved. This is assuming the earner is only purchasing necessities and not consumeristic products. Over time it could be a shock to the economy if a massive amount of people do not spend money on consumeristic products. That is most certainly the case. In 2009 the American savings in banks rate spiked up by 6% (The Economist, 2009). This correlates with the American Recession during that time. During the Great Depression people withdrew all their money from banks in panic which caused the banks to have no money to loan to people. The opposite happened with the Recession where people did not want to spend their money and they saved it.
There are a lot of negatives associated with the paradox of thrift where money not spent does not enter the economy which affects the economy. The positives are pretty simple to see which is you have money saved in case of contingencies or problems. If you have too many people saving money and not spending the economy suffers but if you have too many people withdrawing money then the banks have nothing to spend.
Jason Forum (175 Words)
An interesting paradox called the “Paradox of Thrift” arises when households become concern about their future and attempt to increase their saving. As a consequence of such action the overall economy will suffer. Explain. Do you agree with this assessment?
As we discussed in a previous forum compared to the classical economists, Keynesian economists attempt to account for the household choosing to save a portion of total income rather than recirculating the entire income back into the economy. This is also known as the “Paradox of Thrift” when individuals are concerned with a downturn in the economy they begin to save a larger portion of revenue while unsure of what the future may hold. This can lead to a fall in aggregate demand which in turn can cause a decrease in overall economic growth. When looking at the total Gross Domestic Product (GDP), a very large portion comes from personal consumption. This includes spending done by individual households during a specific time. As you can see, if a large portion of the population is saving their income instead of spending it because of an economic recession, it directly impacts the total GDP.
I believe this is a fair assessment of the cause and effect of households choosing to save money rather than spending it on goods and services. When income is recirculated into the economy demand increases, businesses thrive and economic growth can occur. When people buy less things, it causes a domino effect in the economy. When the demand decreases for goods and services there is also a decrease in the need for employees to produce those goods, leading to less employment. I agree that the economy depends strongly on personal consumption to thrive and grow. If the personal consumption is decreasing because saving is increasing, it will directly affect economic growth.