A lot of people think that

when people save money

instead of spending it

that's bad for the economy.

So today we are going to talk about

why those people are wrong.

We'll start with our

national income identity.

We're looking at a closed economy.

So there are no net exports.

The dynamics would be the same

if we included an external sector

but let's keep things simpler.

Subtract consumption

and government purchases

from each side.

That gives us Y- C - G

on one side

and then investment on the other.

Think of Y-C-G

as the national income left over

after all the expenditures

on consumption and government.

That leftover income

is called national savings.

Its income earned but not spent

by households or the government.

And look national savings

is equal to investment.

That's not some accident.

That leftover income gets saved,

put in the bank

or used to purchase stocks or bonds.

Well what happens to the money then?

The bank loans the money

to businesses to fund investment

or the stocks and bonds

help businesses raise money

to pay for investment.

Either way that national savings

gets funneled

through the financial system

to be loaned out to businesses

who use it to buy new capital,

delivery trucks, factories,

office buildings, computers, bulldozers.

We can think about this process

by zooming in

to look at just one household.

Suppose they make $70,000 per year,

pay $9,000 in taxes

and spend 48,000 on consumption

things like food, housing,

entertainment, utilities, fuel

that kind of thing.

So 70,000 - 9,000 - 48,000 = 13,000

left over after taxes

and consumption spending.

Where does that money go?

Unless the household lights

that $13,000 on fire

they're going to save it.

Let's say by putting it in the bank.

In the meanwhile

there's a restaurant

that needs a loan to buy

new refrigerators and ovens.

The bank loans the money

to the restaurant and makes

those investment expenditures.

So even though the household

isn't spending that money

on airline tickets, or baseball games

that money does good spent

on ovens and refrigerators.

We can scale this backup

to our national savings equation.

The household savings

was income minus taxes

minus consumption.

I see income and consumption

at the national level

but where are taxes?

Well if you don't see minus taxes

and put it in yourself

subtract T from both sides

then just for fun

I'm also going to add T

to both sides.

On the right side

I am going to let negative T

and positive T cancel out

leaving us with just investment again,

but on the left side

I am going to rearrange a bit.

In one term we have Y - T - C;

income minus taxes minus consumption.

That's the same concept

we were looking at for our household

just scaled up to the entire economy.

That's all income

minus all taxes

minus all consumption.

It's the component of national savings

done by households

and we call that private savings,

but what about that other term T - G?

That's the difference between

what the government brings in taxes

and what it spends, G.

That's the component of national savings

done by the government

and we call it public savings.

Public savings

can be positive or negative.

If tax revenue is greater than

government purchases

then public savings is positive

and it adds to national savings.

If tax revenue is less than

government purchases

then public savings is negative

and subtracts from national savings.

So to recap Y-C-G

is called national savings.

It's the income left over

after household and the government

do their spending.

National savings

is equal to investment.

The savings get funneled

through the financial system

and loaned to businesses

who use those loans

to pay for investment expenditures

on new capital.

National savings is also

made up of two components;

private savings

done by households

and public savings

done by the government.

To check your understanding

of how these work let's work

through the following problem.

Suppose you know

the national income is $10 trillion,

consumption is $7 trillion,

government purchases are $1 trillion

and public savings is -$0.4 trillion.

Let's see if we can find

investment, taxes, private savings,

and national savings.

Well we know public savings is T-G

and we know that

it's equal to -$0.4 trillion.

We are told that G is $1 trillion

so that means the T

must be positive $0.6 trillion.

Now that we have T

we can solve for private savings

which is Y - T - C

that's $10 trillion

-$0.6 trillion -$7 trillion

which is $2.4 trillion.

We know the national savings

is private savings 2.4 trillion

+ public savings, -$0.4 trillion

which gives us $2 trillion

and conveniently national savings

always equals investment.

So investment must also be $2 trillion.

Now doing it on your own.

Suppose that you know

national income is $12 trillion,

consumption is $8 trillion,

investment is $1.5 trillion

and private savings is $1.8 trillion,

let's see if you can find

government purchases, taxes,

national savings

and public savings.