Updated: Aug 20, 2021

Not spending income on consumption. lncome which is not spent on consumption is by definition saved. An important point to be made about this definition is that it is rather wider than conventional usage of the word: it is not necessary for an income earner to place money in a savings account or buy some kind of asset to be saving in the sense used here. Simply leaving money in a jar on the shelf, as long as it represents non-spending of current income, is saving. Economists choose this definition because the important feature of saving is that it represents money which, having been paid out as income to households, does not flow back to firms in the form of expenditure on goods and services. If there were not some other source of expenditure on goods and services to replace the amount saved, firms would find that they were producing too much and would therefore reduce production, implying in turn a fall in income and employment. In fact, another source of expenditure does exist, and this is investment. If the amount invested just equals the amount saved, income and employment will show no tendency to change, i.e. they wil be in equilibrium. If investment is less than saving, total expenditure will be inadequate to maintain the previous leve! of output, income and employment, which will all tend to fall. lf, however, investment is greater than saving, expenditure must be more than enough to maintain the previous levels of income which will tend to rise. Thus we can say that for income and employment to be in equilibrium, expenditure on investment must be just equal to saving or non-expenditure on consumption. This is the basis of the theory of income determination.

Reference: The Penguin Dictionary of Economics, 3rd edt.

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James Knight
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James is a lead content editor for Invezz. He's an avid trader and golfer, who spends an inordinate amount of time watching Leicester City and the... read more.