g this income spends all of it on consumption that will be the maximum standard of living he or she can achieve on that income leaving out the possibility of borrowing. If this individual decides to save there current standard of living will be below what it could be; therefore, when you save you deliberately reduce your standard of living below what you could enjoy if you spend everything on consumption. Why do people do that? This is what happens if you deliberately reduce you standard of living. In diagram Savings and Economic Growth 1Table 6$90,000 is spent on consumer goods and services and $10,000 is saved, however the individual could be consuming $100,000. What happens? By next year and as the result of saving - now I should let you know the assumption is $10,000 is saved at annual interest rate of 10% so over a year a period of a year the 10% interest rate will yield an additional $1,000 dollars.Table 7Now that means the income has increased from the $100,000 of 1999 to $101,000 of 2000. The red lines that extend to the outer band of the pie signify this. That additional band represents the additional $1,000 dollars that is derived from the interest on savings of $10,000. Now additional income is available for consumption if the individual wants to spend it on consumption. I’m also assuming that the additional $1,000 that the individual gets from the 10% interest rate return on the $10,000 will continue to be saved at the rate of 10% of his income. In 2000 the individual is going save $10,000 + 10% of the $1000, which is $100. The individual now has an extra $900 to spend on consumption total spending is $90,900. Now that’s not too impressive but it’s important to remember “savings is a stock.” (Hazlitt 177) If you save $10,000 in 1999 and you add $10,000 in 2000 you get $20,000 you save another $10,000 in 2001 you have $30,000 together with interest the individuals total savings by the end of 2001...
