Effective Demand and Sectoral Balances

• Let's try to put Keynes' theory of Effective Demand into Sectoral Balances framework

        (S - I)     + (T - G)       + (M - X)    ≡ 0

• For time being, assume both government sector and foreign sector are stable

        (S - I)     + (T - G)       + (M - X)    ≡ 0

        ???           Stable          Stable       Unchanging (by definition)

• Keynes: investment spending (I) is volatile

• What about savings?

  • Savings (S) is residual from consumption spending (C)

  • Consumption is stable (marginal propensity to consume)

  • Therefore savings is also relatively stable

• Domestic private sector balance

        (   S           - I        )

            Stable        Volatile