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प्रश्न
Discuss the adjustment mechanism in the following situation :
Ex-Ante Investments are greater than Ex-Ante Savings.
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उत्तर
Ex-Ante Investments are greater than Ex-Ante Savings:
The situation when Ex-ante investment (I) exceeds Ex-Ante saving (S) i.e. when injections into the circular flow of income is greater than withdrawal from the income, then it implies that total consumption expenditure is greater than what is required to purchase the available supply of goods and services. In other words, we can understand this as low saving implies high consumption, which means that the required output is more than the planned output. Thus, there will be unplanned depletion of inventory (or unplanned dis-investment). In response to this, to increase the stock of output, the producers plan to expand production in the next period; thereby increase the employment of factors of production. The increased employment leads to rise in aggregate income in the economy, consequently, higher aggregate saving. The saving will continue to rise, until, it becomes equal to the investment. At a point, where saving and investment are equal, equilibrium is achieved. This process of the adjustment mechanism is explained below graphically.
In the figure, S and I represent the Saving and Investment curves. Let us suppose that the equilibrium is facing a situation, where investment (TY´) exceeds saving (KY´). Consequently, the aggregate consumption expenditure is higher than what is required to buy all the goods and services. Therefore, there exists unplanned depletion of inventory or unplanned dis-investment by TK (i.e. TY´ – KY´) and the producers respond by increasing the production by hiring more factors of production. Consequently, employment increases, and the income of the factors (of the people) rise. Subsequently, the saving rises due to increased income. Hence, the saving will continue to rise, until, saving equates investment at point E. The economy achieves equilibrium at point E, with saving equal to investment and OY level of national income (or output).
