INCOME EFFECTS OF INVESTMENTS AND WAGES WHEN SAVING RATES DIFFER* by FRITZ HELMEDAG † Technische Universität Chemnitz Macroeconomic reasoning often postulates a uniform saving rate. Yet, this approach is only consistent with two special cases: either all house- holds spend the same fraction of earnings or the shares in national income are held constant by assumption. Both premises lead astray. It is shown that fluctuations in investments (as a synonym for autonomous demand) generally affect distribution. In addition, the impacts of a changing wage bill on domestic product (‘purchasing power argument’) or profits (‘wage–profit trade-off’) are revealed. 1 E D  S S Standard textbooks on macroeconomics lack a profound analysis of the mutual relationships between income and expenditures. Accordingly, a full explanation of the circular flow is missing. Thus, a fundamental question of the field is blended out: how are the decrease in net funds (‘investment’) of some subjects and the accumulation of pecuniary wealth (‘saving’) of others connected? The problem arises because all payments turn completely into earnings, but the received money will be spent neither entirely every time nor always to 100 per cent in the real sector of the economy. Disciples of the prevailing approach rest their expositions on the oppos- ing forces of supply and demand; that is to say, they apply their usual microeconomic tools to tackle macroeconomic issues. Consequently, the flow-balance conditions are largely neglected. In so far as multiplier effects appear, they are restricted to simple income–expenditure exercises, where uniform saving rates are presupposed. 1 The subsequent analysis uncovers that the popular depictions do not merely oversimplify matters; more severely, they misinform in principle. In the present paper we deal with the impact of spending decisions and the wage bill on the nominal values of domestic product and profits, i.e. amounts of money per period of time. 2 In this respect, the ‘purchasing power argument’ deserves scrutiny. It is quite often put forth by trade unions’ * Manuscript received 2.2.07; final version received 21.2.08. † Valuable comments by two anonymous referees are gratefully acknowledged. The usual caveats apply. 1 See, for example, Blanchard (2003), Carlin and Soskice (2006) and Mankiw (2006). 2 It seems reasonable to suppose that in phases of underemployment and fierce competition a rise in national income more likely affects quantities than prices. In the following, however, this is not a point at issue. The Manchester School Vol 76 No. 6 December 2008 1463–6786 708–719 © 2008 The Author Journal compilation © 2008 Blackwell Publishing Ltd and The University of Manchester Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK, and 350 Main Street, Malden, MA 02148, USA. 708