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Savings identity

Savings identity Definition

Savings identity or the savings investment idenity is a concept in economics stating that the assumption that the amount saved (S) in an economy will be amount invested (I).

Expressed in equations, if income is Y, Consumption C and Savings S then

Y=C+S

if Production is P, profit is p and Investment is I

Y = P+p+I

If the market is in equilibrium, P+p=C

Y=C+I

Since Y=C+S subtract C from both sides

C+S=C+I

therefore

S=I

Adam Smith notes this in Wealth of Nations and it figures into the question of general gquilibrium and the general glut controversy. In the general equilibrium model savings must equal investment for the economy to clear.

Classical economics assumed that S=I at all times, and therefore the market is always in equilibrium.








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