Question

Define aggregate saving and how it relates to real GDP according to classical theory?

Define aggregate saving and how it relates to real GDP according to classical theory?

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Answer #1

In economics, the aggregate saving can be defined as sum of individual savings implying the portion of national disposable income which the individuals are not using for final consumption expenditure. According to classical theory the economy is self regulating. The response of classical theorists' is that the funds from aggregate saving will be borrowed eventually and turned into investment expenditures, and it is a component of real GDP. In an economy when the aggregate saving exceed the requirements of the borrowers it will cause the real GDP to fall below its natural level because investment expenditures will not be higher than the level of aggregate saving indicating that equilibrium real GDP would be below the natural level.

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