By D. C. Rowan (auth.)
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Additional info for Output, Inflation and Growth: An Introduction to Macroeconomics
This, on analysis, consists of three propositions: 1. If a tax of 6p per packet is imposed, then cigarette consumption per year will fall by a certain amount; 2. If cigarette consumption falls by this amount, then the incidence of lung cancer will decline; 3. It is desirable that the incidence of lung cancer should decline. Proposition (1) is easily recognisable as a prediction about the way the economic system works. It is a proposition in positive economics. Proposition (2) is similarly a prediction in human biology.
But we have already defined the process of adding to the capital stock as investment. Hence saving and investment, as we have here defined them, are simply two different ways of looking at the same quantity of output. Now this identity between the accounting concepts of savings and investment has, surprisingly enough, caused a lot of confusion. The student should remember (i) that it is an identity which is true by definition; (ii) that it refers to the results of past decisions and does not tell us whether those results were expected or unexpected, wanted or unwanted.
These are important points, for in the accounting sense precisely the same identity holds between demand and supply. This can easily be seen as follows. The value of demand in any period can be defined as the value of purchases on the market, for all that is purchased must be demanded. That is: value of demand = value of purchases The value of supply, on the other hand, must be equal to the value of sales, for all that is sold must be supplied. Hence: value of supply = value of sales Now, since sales= purchases (they are merely two aspects of the same set of transactions), demand must equal supply, by definition.