Relationship between Income and Consumption

“In economics, consumption + savings = Income. The income an induvial, or a country, produces is either consumed and/or saved. If you , or a country, overspends, you or the country dips into savings or creates debt.”

I think this answer is true for the firm or the individual but in the whole economy it is no longer true.

In the macroeconomy, every time some person or entity doesn’t spend, some other person or entity has their income reduced by the same amount. And because that person won’t get their hands on that money, they will not have it to spend further, so the next would-be recipient of that spending doesn’t get that income, which they in turn will not be able to spend….. and so on

This statement implies that when someone spends money, the money disappears. However, whenever money is spent, the money still exists in the hands of the recipient of that spending. Then when that person spends that money they received, again, it does not disappear, it is transferred to the recipient of THAT spending etc. At the end of all that spending, at the end of the given time period, the money used will still exist and can be considered as savings, in someone’s pocket.

So someone making that argument for the macroeconomy must be talking about something other than spending of money.

Relationship between Income and Consumption

Study in Germany

Perhaps they are talking about wealth. Perhaps they are implying that all that spending depletes wealth.

I would suggest that spending more often than not leads to the production of wealth, either by paying for goods expected to be sold right away, or in anticipation of sales in the future

Either way, for the most part those things sold will not be produced or cared for if someone wasn’t going to buy them. Whether perishable items, most of which help preserve some more durable form of wealth, like human capital, for instance. Or durable forms of wealth are produced that will last beyond the current time period. It is the “spending” that encourages the increased production and preservation of wealth.

So whether you spend it or not, in terms of money you will have the same amount of money at the end of the given time period. which we can refer to as savings.

But with the spending you will increase the production of wealth. Either way, in the macroeconomy, “Spending” is what leads to wealth production, “not spending” reduces wealth production and does nothing to increase money saved. That money saved will exist whether used for spending or not.

So on either front, if the goal is to increase savings, and increase the net production of wealth, “not spending” is the wrong advice. “Not spending” will not increase the savings that is the preservation of investment, and it will likely not increase the net production of wealth, in fact it is more likely to decrease both. In the macro economy, “not spending” is more likely to have negative effect on the production of wealth and standard of living, than a positive one.