What is the macroeconomic paradox

The paradox of savings

Participants in a market economy often save for personal and understandable reasons. However, it canSave up economically speaking tooless consumption and thus lead to a drop in sales

Ultimately, this in turn leads to less production and consequently to falling incomes. Ultimately, however, the participant can save less as a result of falling income. Even the depletion of savings can be associated with it.

In theory, the level of production in an economy falls until the remaining income equals the cost of living in the economy. This cycle is also called economicallyThe paradox of savings designated.

Saving in the national economy

From an economic point of view, private households can use their money for two things: Consumption and Saving. Consumption is also understood when, for example, a house is built or a car is bought. All the money that is not consumed is saved automatically. Households save you one the greater the portion of their income, the higher it is. An example:

  • A financially weak household has 1,000 euros net available per month. After paying rent, food, clothing and other everyday goods, only 50 euros remain. These are spent on luxury goods.
  • The same budget now has over 2,000 euros. Then the expenses for rent, food and clothing only increase insignificantly. In addition, 600 euros are spent on leisure and luxury, but 400 euros can now be saved per month.

The cycle of the savings paradox

The problem with this ever increasing savings rate is that the money is withdrawn from the economic cycle in the short term. Suppose all households get more income from their employers. Then they decide to save a larger part of their income than before. Through this macroeconomic consumer demand fallswhich in turn leads to losses for companies.

As a result, wage cuts or layoffs occur, but they don't lower the savings rate again. Rather, private households are afraid that they will no longer be able to maintain their standard of living in the future. They fear bad times and therefore save even more moneyin order to be able to react to possible unemployment. That in turn leads to even less consumption, further layoffs and further savings. This cycle is only ended when the wage level is so low that households can no longer save capital. After all, despite all the crises, food has to be bought and rents paid.

Savings Paradox - Definition & Explanation - Summary

  • The savings paradox arises from an excessively high savings rate
  • This ensures a decline in overall economic demand
  • As a result, companies generate losses, lay off employees and lower wages
  • Households react by saving more to protect themselves against bad economic times