How are household savings accounted for using the expenditure approach if they are not invested?

Question:

Hi there, thanks for taking the time to answer my question.

I understand the basics of measuring GDP based on the product, income, and expenditure approaches, but I am stuck on a simple question: how are household savings accounted for using the expenditure approach if they are not invested?

In other words, say I earn $100, spend $98, and deposit $2 in a non-interest earning savings account. If the $2 (along with a lot more money, presumably) gets lent out to a company that builds a factory, then clearly that would be investment, but what if it just sits in the savings account? Does that count as “residential investment”?

Answer:

There are two components to investment in the national income identity. In addition to expenditure on capital equipment and buildings by firms, investment also includes additions to business inventories (goods that firms did not sell). So if you consume less and save more (your $2), those savings may end up not increasing investment in new capital but total investment still rises because the firms’ inventories (those goods that consumers did not buy) increase.