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Explain what is meant by the economic term 'Paradox of Thrift'. - Leaving Cert Economics - Question 6 - 2013
Question 6
Explain what is meant by the economic term 'Paradox of Thrift'.
Worked Solution & Example Answer:Explain what is meant by the economic term 'Paradox of Thrift'. - Leaving Cert Economics - Question 6 - 2013
Step 1
Definition of the Paradox of Thrift
Answer
The Paradox of Thrift refers to the economic theory that while it is beneficial for individuals to save money, an increase in overall savings can lead to negative consequences for the economy. When individuals save more, they typically reduce their consumption. This reduced consumption can lead to lower demand for goods and services.
Step 2
Impact on National Savings
Answer
As individuals decrease their spending, businesses may see a drop in sales, which can lead to lower revenue. Lower revenues can result in businesses cutting costs, which often means reducing employment. With rising unemployment, overall household incomes fall, leading to a further decrease in consumption. Thus, the initial increase in individual savings can paradoxically lead to a decrease in national savings.
Step 3
Diminishing Circular Flow of Income
Answer
In the context of a diminishing circular flow of income, increased savings by individuals can disrupt the circulation of money within the economy. When individuals save rather than spend, the flow of money slows down, leading to a potential reduction in economic growth and stability. Ultimately, while saving is important for individual households, its collective impact can make the economy less robust.