Propensity to Save and to Consume
Disposable income is what’s left of personal income after taxes, and there are only two things a consumer can do with that income: spend it or save it. Either way, that income is being recycled into the economy as part of consumption—the C in C + I + G—or as part of investment—the I in C + I + G.
Up to now in this book, I have spent a good deal of time discussing demand. We will discuss it again, even in this chapter—but first, let’s focus on the investment aspect of GDP. Investment in capital goods does not simply represent a boost to GDP in the year it is made. It represents a boost to the economy in the years ahead. Remember, investment in capital goods expands our economy’s productive capacity.
When people ...