Monday, 23 May 2011

The size of the National Income is determined at the point where saving are equal to investment

Keynes says that savings are always equal to investment. He put his statement mathematically, S = Y - C, S = Saving, Y = Stands of income, I = Investment. This definition applies to both individual and for community. Saving may be large or small but it depends upon the income. The higher the income the higher the savings other things remaining the same.

INVESTMENT : It is equal to the I = Y - C
I = Investment, Y = Income, C = Consumption.
Keynes proves it as follows :
S = Y - C
I = Y - C
S = I
Aggregate investment is always equal to the aggregate savings. This can also be proved like this :
Y = C + I
Y = C + S
C + I = C + S
Savings = Investment
These can be equal at the level of full employment above the level of full employment and below the level of full employment.
Prof. Keynes says that the level of national income brings equality between the savings and investment.

Note : It is the real savings and real investment which is always equal.

In case of money saving and money investment a difference can arise. Because savings are made by other people and decisions of investment are made by the other people. Sometimes savers may save more or less than the demand of the investors and it disturbs the equilibrium of the economy. We can explain these stages by the following schedule and diagram.


First Stage :- According to this schedule when national income is Rs. 20 million, it is desirable stage of equilibrium. Because at this stage aggregate national expenditure is equal to the national income.

Second Stage :- If the national income is greater than 20 million, the savings will be greater than the investment. Due to greater savings, the total demand of various goods will decrease. The investors will reduce the production and rate of unemployment will increase. The power of savings will reduce and again the savings will be reduced to the investment. The national income will reach to an equilibrium.

Third Stage :- If the investment is greater than the savings, it means the demand of the people greater than the supply of goods. The price and profits of good will rise and producer will increase the production. The rate of employment will increase. The income of labour will also rise. With an increase in income, rate of saving will rise up to the level of investment. At this stage the national income will be in equilibrium.

Explanation :
According to this diagram, SS is the savings curve at the point "F". Investment is greater than the saving. Savings are Rs. 5 million while investment is 9 million. So at the point "B" savings are greater than the investment. Because savings are Rs. 11 million and investment is Rs. 9 million. At the point "A" savings and investment are equal to each other.
At the point "F" when investment will be greater than the savings then demand of goods will rise. It will increase the prices,profits and rate of employment. The rise in income will increase the rate of saving and automatically it will become equal to the investment.While at the point "B" greater savings will decrease the demand, production and rate of employment. Ultimately the income and saving rate will fall up to the level of investment.
So investment should not be more than the savings or less than the savings, these should be equal to each other S = I.


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