On Significant Misunderstandings in Macroeconomics

Yasuhito Tanaka

MPRA Paper from University Library of Munich, Germany

Abstract: I present arguments on significant misunderstandings in macroeconomics about relationship between investment and savings. I will show that investment and savings are undertaken by the same economic agent. To summarize the meaning of Investment = Savings most simply, (setting aside the government and overseas factors) since savings are defined as income minus consumption, spending money on consumption increases the recipient's income without changing savings. Spending money on investment also increases the recipient's income, but since it's not consumption, the “minus consumption” component doesn't occur, so savings increase. Therefore, investment equals savings. The intermediary function of banks has nothing to do with it. Excluding the government and overseas sectors, total financial assets amount to zero. Therefore, savings in the equation investment = savings do not represent the accumulation of financial assets. Instead, investment represents the accumulation of fixed assets. Consequently, this savings also constitutes an increase in fixed assets. Both investment and savings involve spending money to purchase goods. Defining savings as income minus consumption minus investment yields savings = fiscal deficit plus current account surplus. This correctly represents changes in financial assets.

Keywords: Savings; Investment; Significant Misunderstandings (search for similar items in EconPapers)
JEL-codes: E00 (search for similar items in EconPapers)
Date: 2025-10-28
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