Simple Keynesian Model








Back to A-level Index Page




Paradox of Thrift

'Thriftiness, while a virtue for the individual, is disastrous for an economy.’

Assume a 2-sector Keynesian model.

Suppose there is an exogenous increase in planned saving. (For example, there is an increase in the fear of losing jobs.) This means that the autonomous saving will increase. Graphically the saving function will shift vertically upward. (Click play on diagram)

Before change:

  • Equilibrium income = Y1
  • S = I = A

After change:

  • At Y1, S = B; I = A; S > I
  • S > I implies Y > AD:Excess supply of goods exists

Click play on the diagram:

  • The new equilibrium income is Y2. (Income decreases)
  • As income decreases, saving decreases from B to A and I = S again!

As a result, the income will decrease but the realised saving will remain unchanged at point A.

Paradox of thrift

The result is paradoxical because an increase in the desire to save leads eventually to

  •   a decrease in income. (市民增加儲蓄意欲反令其收入下降!)
  • no increase in realised saving. (市民增加儲蓄意欲卻不能使實際儲蓄到的金錢增加!)

Resolve the paradox

The above paradoxical results may not happen if an increase in planned saving will lead to an exogeneous increase in planned investment. Graphically both the investment and the saving funtions will shift vertically upward. (Click play on diagram)

After change:

  • Y remains at Y1
  • Saving increases from point A to point B.

As a result, the income may not decrease and the realised saving will increase.

Fallacy of composition (組合謬誤)


  • 個人儲蓄可以累積財富,但若全部市民都增加儲蓄卻反令 GDP 下降!
  • 個人儲蓄可以累積財富,但若全部市民都增加儲蓄卻反而無法令社會的總儲蓄上升!






Econman (7 / 10/ 2000)