Frugal economy, Managerial Economics

The Frugal Economy

In the Frugal economy, households and firms look to the future, and as a result undertake both Saving and Investment.

SAVING

Saving is income not spent on goods and services for current consumption.  Both households and firms can save.  Households save when they elect not to spend part of their current income on goods and services for consumption.  Firms save when they elect not to pay out to their owners some of the profits that they have earned.  Distributed profits are profits actually paid out to the owners of firms, and undistributed profits are profits held back by firms for their own uses.

INVESTMENT

Investment is defined as the production of goods not for immediate consumption.  All such goods a are called investment goods.  They are produced by firms and they may be bought either by firms or by households.  Most investment is done by firms, and firms can invest either in capital goods, such as plant and equipment, or inventories.

The total investment that occurs in the economy is called Gross Investment.  The amount necessary for replacement is called the Capital consumption Allowance and is often loosely referred to as Depreciation.  The remainder is called NET Investment.

The current production of final commodities in the frugal economy can be divided into two sorts of output.  First, there are consumption goods and services actually sold to households.  Second, there are investment goods that consist of capital goods plus inventories of semi-finished commodities still in the hands of firms.  The symbols C and I can be used to stand for currently produced consumption goods and currently produced investment goods respectively.

In an economy that uses capital goods, as does the Frugal economy, it is helpful to distinguish between two concepts of National Income (or National Product).

GROSS NATIONAL INCOME (or Gross National Product, GNP); It is the sum of the values of all final goods produced for consumption and investment, and thus it is also the sum of all factor incomes earned in the process of producing the National output.

NET NATIONAL INCOME (or Net National Product, NNP) is GNP minus the capital consumption allowance.  NPP is thus a measure of the Net output of the economy after deducting from gross output an amount necessary to maintain the existing stock of capital intact.

Posted Date: 11/28/2012 6:39:01 AM | Location : United States







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