Chapter 6 - Determination of National Income

http://www.nytimes.com/2009/02/03/business/economy/03econ.html

Americans are Saving More than spending

Summary
One government report showed that the American spending decreased for the sixth month in December, while the other report said that construction spending dropped 1.4% in December from November as house values fell. In the last three months of 2008, the personal savings rate of 2.9% grew surprisingly to it’s highest peak in since 6 years when it’s country was getting better from the recession and the 9/11 attack.. “If households are shying away from spending, what’s going to cause businesses to start spending again?” asked Aaron Smith, senior economist at Moody's Economy.com. Over all, the spending dropped 1% or $102.4 billion in December.

Connection
The connection to the chapter is about how spending can change when households increase the amount of money they save. In this case, American households were saving money by not spending it on goods and services. If household savings increase, then the amount of money sent to the business sector in the circular flow would be reduced. Therefore, businesses react by cutting back on production and laying off workers. The loss of employment reduces the flow of money back to the households. With less money available, households will cut back on their spending.

Reflection
The purpose why American consumers are saving more than spending can have many factors. It may be because companies cut their jobs and they declined their investments in machinery. This loses their interest in spending which affects the economy. Although savings had a negative impact in this article, there is a positive side towards it as well. It can benefit investments by being lent to businesses. With more savings, it can help to lower interest rates and create more employment opportunities.