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The colonies have a much higher wage rate than England due to a lower cost of provisions and necessities to survive, which result in a higher competition for human capital among the “masters” of the economy, which in turn raises the wage rate and increases the wage fund. The core of this phenomenon is why Adam Smith believes in the saving ...
The national income identity can be rewritten as following: [2] + = where T is defined as tax. (Y-T-C) is savings of private sector and (T-G) is savings of government. Here, we define S as National savings (= savings of private sector + savings of government) and rewrite the identity as following:
The disposable income of the households is the income Y minus the taxes net of transfers: = + Disposable income can only be used for saving or for consumption: = + where the subscript P denotes the private sector.
The MPS plays a central role in Keynesian economics as it quantifies the saving-income relation, which is the flip side of the consumption-income relation, and according to Keynes it reflects the fundamental psychological law. The marginal propensity to save is also a key variable in determining the value of the multiplier.
Discretionary income is disposable income (after-tax income), minus all payments that are necessary to meet current bills. It is total personal income after subtracting taxes and minimal survival expenses (such as food, medicine, rent or mortgage, utilities, insurance, transportation, property maintenance, child support, etc.) to maintain a certain standard of living. [7]
Falls (increases) in income do not lead to reductions (increases) in consumption because people reduce (add to) savings to stabilize consumption. Over the long-run, as wealth and income rise, consumption also rises; the marginal propensity to consume out of long-run income is closer to the average propensity to consume.
To summarize, in the U.S. in 2019, there was a private sector surplus of 4.4% GDP due to household savings exceeding business investment. There was also a current account deficit of 2.8% GDP, meaning the foreign sector was in surplus. By definition, there must therefore exist a government budget deficit of 7.2% GDP so all three net to zero.
This is an accepted version of this page This is the latest accepted revision, reviewed on 24 December 2024. Economic system based on private ownership This article is about an economic system. For other uses, see Capitalism (disambiguation). "Capitalist" redirects here. For other uses, see Capitalist (disambiguation). Part of a series on Capitalism Concepts Austerity Business Business cycle ...