How can income-expenditure framework determine the effect of perosnal savings on the economy?
Answer:
the frame work explains how to balance the supply and demand for it to meet the stage of equilibrium, inorder to maximize your investment. so if your economy is driven by let us say export products, and let us assume that asia is your main client.
If asians personal savings is "high" it would mean they have money to purchase things outside of the "basic" necessities in life.
So let us say your country being USA develops high end mobile phones where in asia is their target market, Asia orders units . let us say for 5 months now and they place orders consistently. The framework then can be used to determine the number of units to be purchased by Asia to keep its inventory at a healthy level (equilibrium). In this frame work USA can then maximize it's investment making sure that there are no lost opportunity if demand was high but inventory is low, and if demand is low and inventory is high, it would mean that investment opportunity is lost in such a way that it is not getting a good ROI>
to correlate this to USA's economy, the income from this particular "business" can be computed as to its effect on industries involved in its production, the employment that it provides, the money flow etc etc. using other models and mathematical formula.
Hope I made sense. ;-)
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