Savings as we already know is the “excess of income over what is spent on consumption”. Therefore any problems arise out of the definition of investment or income.
Keynes states that the popular definition of Investment is “the purchase of a capital asset of any kind out of income”. However, under his definition one must include the increment of capital equipment, whether it consists of fixed capital, working capital or liquid capital.
Keynes emphasises the “total change of effective demand and not merely that part of the change in effective demand which reflects the increase or decrease of unsold stocks in the previous period”.
The volume of employment is determined by entrepreneur’s expectations regarding his present and future profits (maximisation of profits), whilst the volume of employment that maximises his profits is dependent on his views on proceeds resulting from consumption and investment. Therefore the volume of employment is determined then by entrepreneurs’ effective demand and expected increase of investment to saving.
Change in a the volume of output and employment causes a change in income as measured in wage-units and further change in latter causes redistribution of income between borrowers and lenders and also causes change in aggregate income.
Keynes defines forced savings as ‘the excess of actual saving over what would be saved if there were full employment in a position of long-period equilibrium”. However, this is unlikely to occur in the real world as full employment is unachievable and this usually results a forced deficiency of saving.
In Section V Keynes highlights the interdependence of savings and investment. He states that investment, in the aggregate, cannot take place without savings. However, this cannot be taken to mean that savings increase investment by an equal amount.
Keynes also notes that savings and investment have an impact on incomes. It is impossible for all individuals to increase savings by reducing consumption without having an impact on aggregate income.
In conclusion, it must be noted that in the aggregate savings and investment are not autonomous nor is the level of demand or cash held by individuals.
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1 comment:
Good summary, with a few more definitions would have been the best in the class. The discussion of forced saving is nice (do you think it's happened in Ireland?) but doesn't really speak to the purpose of the chapter as a whole: what does it mean to save more or investment more?
Overall nice summary though.
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