<p>"GDP" stands for "Gross Domestic <em>Product</em>". It measures the <em>income generated</em>, prior to any consumption-saving allocation. In other words, to be able to save you must first generate product/income and then decide to save. So savings does not affect the level of the already created income, since it is a part of it. The archetypal closed economy with no borrowing is characteriazed by the identity</p>

<p>$$Y = GDP = C + I = C + S$$</p>

<p>When we look the matter from an expenditure approach, we essentially consider the different <em>uses</em> of income (and in that sense the use of the term "expenditure" may be a bit misleading). And savings <em>is also a way to use your income</em> (where "use" has a broader meanign than "spend").</p>

CC BY-SA 3.0
2016-12-21T15:02:03.343Z
How is I = S in the above equation ? If we cancel out C(consumption) on both sides.
saurav1405
CC BY-SA 3.0
2016-12-21T15:04:14.863Z
In the specific archetypal abstract model, savings equal investment by construction. But even if one wanted to consider "hoarding" (i.e. savings that are kept interest-free), it would not alter the fact that GDP creation comes first, allocation decisions after.
Alecos Papadopoulos
CC BY-SA 3.0
2016-12-21T16:56:59.850Z
GDP of the next year should decrease if people save money this year because demand will be less than supply and the extra goods will be stored as inventories hence the firms will produce less next year thus less GDP
saurav1405
CC BY-SA 3.0
2016-12-21T18:23:39.360Z
@saurav1405 Your comment explicitly introduces an intertemporal aspect which was totally absent from your question. For the _new and different question_ (for which you should open a new thread here and not edit this one), whether savings today will reduce GDP tomorrow, I refer you to the standard (and empirically verified) growth theory.
Alecos Papadopoulos
CC BY-SA 3.0
2016-12-21T14:58:52.703Z
2016-12-21T14:58:52.703Z
Alecos Papadopoulos
<p>When we are saving from our income then we don't consume as mush as we earn. So the GDP should decrease as well as the income but this does not happen. Why?</p>

CC BY-SA 3.0
2016-12-21T08:52:13.867Z
Other entities like government will borrow, spend and consume.
mootmoot
CC BY-SA 3.0
2016-12-21T09:44:05.310Z
It can happen: see for example the [US personal savings rate around the 2008 recession](https://fred.stlouisfed.org/graph/?g=cbWs)
Henry
<gdp><investment><consumption><saving>
Why the GDP does not decrease even when we are saving from our income?
saurav1405
# Why the GDP does not decrease even when we are saving from our income?

(Asked by: username_0 on 2016-12-21)

When we are saving from our income then we don't consume as mush as we earn. So the GDP should decrease as well as the income but this does not happen. Why?

**Tags:** gdp, investment, consumption, saving
> **Comments:**
> **username_1**: Other entities like government will borrow, spend and consume.  
> **username_2**: It can happen: see for example the [US personal savings rate around the 2008 recession](https://fred.stlouisfed.org/graph/?g=cbWs)  

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## 1 answers

### Answer by username_3 on 2016-12-21. Score: 1 | Accepted answer

"GDP" stands for "Gross Domestic *Product*". It measures the *income generated*, prior to any consumption-saving allocation. In other words, to be able to save you must first generate product/income and then decide to save. So savings does not affect the level of the already created income, since it is a part of it. The archetypal closed economy with no borrowing is characteriazed by the identity

$$Y = GDP = C + I = C + S$$

When we look the matter from an expenditure approach, we essentially consider the different *uses* of income (and in that sense the use of the term "expenditure" may be a bit misleading). And savings *is also a way to use your income* (where "use" has a broader meanign than "spend").

> **Comments:**
> **username_0**: How is I = S in the above equation ? If we cancel out C(consumption) on both sides.  
> **username_3**: In the specific archetypal abstract model, savings equal investment by construction. But even if one wanted to consider "hoarding" (i.e. savings that are kept interest-free), it would not alter the fact that GDP creation comes first, allocation decisions after.  
> **username_0**: GDP of the next year should decrease if people save money this year because demand will be less than supply and the extra goods will be stored as inventories hence the firms will produce less next year thus less GDP  
> **username_3**: @saurav1405 Your comment explicitly introduces an intertemporal aspect which was totally absent from your question. For the _new and different question_ (for which you should open a new thread here and not edit this one), whether savings today will reduce GDP tomorrow, I refer you to the standard (and empirically verified) growth theory.  

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