A paradox, the definition of which is familiar to us, means a statement that is devoid of logical meaning and diverges from generally accepted ideas. The assertion that the growth of savings in the incomes of individuals can cause a drop in the actual volume of investments and capital in the economic sphere can also be attributed to this category.
Classical economic theory was built on a different definition. She expressed the view that savings, which are capital, which, if necessary, can become a source of investment, serves as an incentive for the growth of national income. That is, it is a reserve investment fund.
In contrast, the English economist George M. Keynes made the determination that the desire to create inventories exceeds the desire to invest in countries with a highly developed market structure. The paradox of frugality is as follows:
- with the growth of capital, its effectiveness decreases, this is due to a decrease in the number of highly profitable opportunities for its investment;
- the growth of living standards of the population leads to an increase in its savings.
However, unused capital leads to lower consumer spending. This leads to a reduction in GDP and aggregate demand. As a result of these processes, the overall level of income is reduced by an amount that exceeds the amount of unused capital.
Consequently, the thrift paradox is a reduction in the wealth of the population while increasing its savings. Autonomous investments contribute to the growth of national income, as well as derivative investments. This is due to the effect of the multiplier effect.
The growth of any element of autonomous costs contributes to an increase in social income. Moreover, the value that improves national welfare exceeds the sum of the initial level of expenditures. In contrast, a decrease in income inhibits investment growth, which entails stagnation in the economic sphere.
If there is a problem of underemployment in the country , the thrift paradox leads to a decrease in the consumer level. This process affects the value of aggregate demand. Manufacturers of goods are not able to sell their product and make a profit. Their enterprises lose their attractiveness as an object of investment. This leads to a decrease in production volumes, an even greater increase in unemployment and a drop in total income.
A nation is becoming much poorer. This principle was confirmed in those days when the Great Economic Depression of 1929-1933 was observed. The paradox of frugality in the presence of a full-time situation helps to protect the financial sector from “overheating”. This is due to a decrease in the price level due to a decrease in aggregate demand, which serves as one of the main indicators of the economy.
It is consumption that distracts more than sixty percent of all expenditures of the population. Even very slight changes in demand can have a significant effect on the balance of national income and employment. Creating an accurate consumption model would help to ensure a sufficient increase in GDP. With its help, it would be quite simple to predict changes in demand with an increase or decrease in the number of investments and government orders.
Currently, many consumption patterns have been created. Scientists are trying to calculate a certain averaged algorithm that most fully describes the aggregate demand. Creating an accurate model will allow managing the economic processes in society with the greatest efficiency.