Paradox of Thrift essay


Paradoxof Thrift

Accordingto the paradox of thrift, individuals have a tendency of saving moreresources during an economic recession, and this leads to a fall inaggregate demand that eventually results in a decline in economicgrowth (Dwivedi, 2010). The notion of the paradox of thrift is thatindividuals, who save instead of spending, thus worsen the economicrecession. Therefore, individuals’ savings are considered ascommunally harmful. Economic recession is a period when economicactivities are low the unemployment rate is slightly on theincrease, and there is a fall in the stock market.

Increasedsavings during an economic recession reduce the resource that couldhave otherwise been used in investment to boost the decliningeconomic activities (Lipsey &amp Harbury, 1994). When an individualspends, the money that the individual has spent is another person’sincome. This means that savings during an economic recession woulddeny other people income elsewhere. At the same time, failure tospend implies that most businesses will likely incur losses sincebusinesses will not earn as much and may be forced to lay off someworkers. Therefore, there will be an overall effect of increasedunemployment in the economy (Dwivedi, 2010).

Furthermore,increased savings during economic recession implies that a decline inaggregate demand will be realized. One source of government taxes isfrom the goods that are consumed in an economy through the payment ofvalue added tax. So, when consumption is low, government taxes arelikely to be low (Dwivedi, 2010). When government revenue goes down,government expenditure will also go down. Hence, there will be fewerjobs created in the economy. I totally agree with this assessmentbecause I believe that, when consumers spend, they contribute to thecommunal good since what they spend is considered another person’sincome. Therefore, the entire economy would suffer.


Dwivedi,D. N. (2010). Macroeconomics:Theory and Policy.New Delhi: Tata McGraw-Hill Education Pte Ltd.

Lipsey,R. G., &amp Harbury, C. D. (1994). Firstprinciples of economics.Oxford: Oxford University Press.