Explaining S=I: Inventories vs Adding up Individuals

Dec 05 13:12 2018 Print This Article

It's easy to teach students the arithmetic showing that actual saving must equal actual investment (S=I). But many students (quite rightly) want more than the arithmetic. Because S=I is not intuitive, and good students want to understand the intuition. I think that most profs will try to explain the intuition by talking about inventories of unsold goods. But I think it would be better to explain the intuition behind S=I by talking about the difference between individual saving and aggregate saving; some types of individual saving don't add up to aggregate saving.

A student's email is what prompted me to write this post. He's read three textbooks on the subject, and has read my old post, and understands the arithmetic, but still doesn't understand the intuition. Here's one of his questions: "Or, suppose I buy a used car. Is it saving? How will in this example saving be equal to investment?". Here's how I would answer his question: "Yes, your buying a used car is saving, because you spent part of your income on something that is not a newly-produced consumption good. Which is how we define "saving" in National Income Accounting. But someone else must have sold you that same used car, so if you were saving (buying an asset), that someone else was dissaving (selling an asset). It is impossible for everyone to save by buying used cars."

Read More

About Article Author

A Worthwhile Canadian Initiative

Group economics blog written by Canadian Economics professors and authors from the University of Laval, Carleton University, Richard Ivey School of Business, and Lakehead University

Related Items

Appetite for market risk is very low

Tuesday January 22: Five things the markets are talking about Appetite for risk in this holiday shorted week starts on the low side with Euro and Asia equities under pressure in their respective sessions, along with U.S futures, as an uncertain outlook for global trade and growth continues to inhib ...

DAX under pressure as UBS blues drag down banking sector

The DAX index has edged lower in the Tuesday session. Currently, the index is at 11,097, down 0.35% on the day. In economic news, Germany releases ZEW Consumer Sentiment remains weak, but improved to -15.5 points. This was better than the estimate of -18.8 points. Eurozone ZEW Economic Sentiment ti ...

Value In The Lead For US Equity Factor Returns So Far In 2019

Trading is set to resume today for the US stock market with value firmly in the lead for year-to-date performance for the major equity factors, based on a set of exchange-traded funds. In fact, a positive bias prevails across the board for stocks so far in 2019. Headwinds may be brewing via several ...

USD/CAD – Canadian dollar dips to 2-week low as risk appetite softens

USD/CAD has edged higher in the Tuesday session. Currently, the pair is trading at 1.3328, up 0.24% on the day and at its highest level since January 7. On the release front, Canada publishes Manufacturing Sales, which has posted two declines in the past three months. The estimate for the November ...

Data Fast Forward: A Prescription for Innovation, Balance and Trust

Data is now the engine of economic growth and prosperity. Countries that promote data’s availability and use for societal good and economic development will lead the fourth industrial revolution and give their citizens a better quality of life. ...

CPPIB Invests in Intelligent Data Management?

Private Capital Journal reports, CPPIB co-invests with Insight’s US $500 investment in Veeam:Canada Pension Plan Investment Board (CPPIB) has invested an undisclosed amount in Veeam® Software as co-investor to Insight Venture Partners which invested US $500 million in the company.Insight Venture ...

Commodities Weekly: Gold struggles for upward momentum

Slower Chinese GDP growth in the fourth quarter and a resurgent US dollar have taken a bit of the shine off some commodities. NOTE: The US government shutdown is still preventing the publication of the weekly Commitment of Traders report by CFTC. The latest published data is only at December 18. Pr ...