Paradox of Thrift - Assignment Example

Paradox of Thrift Affiliation: Economic variables that account for aggregate demand and supply influence the growth and development of an economy in myriad ways. Consumption and saving are two critical economic aspects that highly influence the extent, magnitude, and direction of economic growth and development. Individuals save for different motives, among them to finance their future spending or for investment purposes. When individuals and households collectively increase their savings in an economy, the economy is highly likely to plunge into economic hardships; a scenario referred to as paradox of thrift (Yates & Hunter, 2011).

This scenario contradicts the individual or household-based argument that saving is good for the economy. In the United States, the Personal Savings Rate (PSR) over the last decade has been increasing and decreasing from time to time depending on the personal savings levels in the economy. The U.S PSR was recorded at 3.40% in December 2011, 5.50% in January 2011, 4.90% in December 2010, 4.50% in December 2009, and 5.70% in December 2008 among others (Yates & Hunter, 2011). This trend can be associated with the performance of the U.

S economy at different times of every single year. The spending and saving of a typical American household is guided by the economic potential of the household. This can be held collectively for the entire economy, where the population spends within its financial limits. By observing the PSR trend over the last decade, it is seen that both spending and saving in the economy fluctuate from time to time. Increase in savings directly lowers spending in the economy, and vice versa. Too much savings in the economy lowers total consumption.

A typical American household spends more than it saves, but summing up increased savings in the economy can result in the paradox of thrift.ReferenceYates, J. & Hunter, D. (2011). Thrift and Thriving in America: Capitalism and Moral Order from the Puritans to the Present. Oxford: Oxford University Press.