Everyday Terms in Macroeconomics – And Their Surprising Implications
Everyday Terms in Macroeconomics – And Their Surprising Implications Macroeconomics is replete with regular-sounding terms such as consumption, savings and investments. However, if we were to interpret them from our everyday household experiences, we could be left with an erroneous understanding of the dynamics of the economy. For instance, all else being equal, when a salaried household reduces consumption, it increases its savings without impacting its income. From an overall economy perspective, however, if we all reduced consumption of domestic goods and services, we would only reduce our total domestic income, with no impact on the stock of total savings. Likewise, our household experience might tell us that savings are a pre-requisite to fund investments. From an overall economy perspective, however, households would struggle to increase the stock of collective savings by themselves. Instead, policymakers might be better advised to focus on investments and exports as a sust