The Paradox of Thrift: Empirical Evidence in Nigeria

Mathias A Chuba

doi:10.47191/ijsshr/v4-i10-50

Abstract

Vermann (2012) and Thies (1996)’s papers indicate that the paradox of thrift is no longer in vogue. This paper argues that the paradox of thrift is applicable to the developing country like Nigeria which is operating with deficient demand. The main objective of this paper is to determine whether the paradox of thrift is applicable to Nigeria. In doing this, a vector error correction model was estimated using annual data of gross national income, gross domestic saving, gross domestic investment and final consumption expenditure from 1986 to 2019. The results of the investigation showed final consumption expenditure and gross domestic saving increase when national income increases. Gross national income falls and current saving is unchanged when previous saving rises. The paradox of thrift is applicable to Nigeria. The target of economic policy should be gross national income and not gross domestic saving because naturally both final consumption expenditure and gross domestic saving will increase if gross national income increases in Nigeria.

Highlights

Americans traditionally believed that saving is a virtue
This change in semantics from planned saving to previous saving and actual saving to current saving does not alter the analysis of the Keynesian economic theory about the paradox of thrift
This paper argues that the paradox of thrift is applicable to the developing country like Nigeria which is operating with deficient demand

Summary

Introduction

Americans traditionally believed that saving is a virtue. Many economists believe that a major contribution of Keynesian economics was the surprising discovery that an increase in planned saving may not be beneficial. Paradox of thrift becomes practicable in applied research when the words, previous saving is used in place of “planned saving” and the words, current saving is used in place of “actual saving”. This change in semantics from planned saving to previous saving and actual saving to current saving does not alter the analysis of the Keynesian economic theory about the paradox of thrift. With this change in semantics from planned saving to previous saving and actual saving to current saving, paradox of thrift is the result of the simple Keynesian model that when previous saving rises (the saving function shifts up), income falls and current saving is unchanged

Objectives

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Results

Conclusion