Tuesday, March 14, 2006

Saving vs. Investment

I know S=I, but saving and investment aren't exactly the same. What is the big difference?

The difference is that saving is what households and the government does when they have more income than consumption. (i.e. they save what they do not consume) Investment is what firms do when they buy capital (or what households do when they buy homes) Households and the government supply loanable funds by saving, while firms (and households) demand loanable funds for investment.


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