Question

Go through the following conversation between two friends who are meeting after a while. Ram: "These days I am trying to save a lot. I have increased my bank balance substantially". Shyam: “But do you know it is harmful for the economy". Ram: “But I am saving for myself.” Name and explain the concept that is implicit in the above conversation.

I need explanation

Answer 1

The harm of increased saving by each individual household to the economy is referred to as paradox of thrift.

Thus,

The concept that is implicit in the given conversation is Paradox of Thrift.

The consumption expenditure by a person becomes the income of the other person.

If a person saves a greater proportion of his income then his consumption will decrease. This decrease in consumption will translate into reduced income for next person who in turn will also reduce his consumption as his income is decreasing. So, income levels in the economy will keep on decreasing.

So, a person would feel better off by saving more but its impact on overall economy is very severe.

This is paradox of thrift where saving is making an individual better off but is making economy as a whole worse off.