Concept of Saving

From an individual’s point of view saving is that part of his income which is not spent on consumption. Similarly, from the community’s point of view aggregate saving is that part of national income which is not spent on consumption. In other words, saving is excess of income over consumption expenditure, i.e., S=Y-C, where, S=saving, Y=income and C=consumption expenditure. In Keynes’ general theory, current savings depend upon current income but Robertson believes that current savings are more a function of past income. According to Robertson, saving is that part of income received in the immediately proceeding period which is not spent on current consumption. According to J.M. Keynes- “Saving is the excess of income over consumption expenditure or the difference between income and expenditure on consumption”. He has made current savings is to depend upon current income. That is, saving is that part of the income which is left after consumption. Hence, there is functional relationship between saving and income. Thus, saving function can be written as:

S= f(Y)

Where, S= Savings

Y= Income

There is positive relationship between saving and income. This means higher the income, higher will be the saving and vice-versa. Saving is different from hoarding. Hoarding is a part of savings which is held as stock of money. It constitutes a leakage in the income stream. Concept of saving can be explained by the help of table and figure below:

Schedule of Income consumption and saving

Income (Rs.) (Y) Consumption (Rs.) (C) Savings (Rs.)

(S) = Y-C

O 0 -50
50 75 -25
100 100 0
150 125 25
200 150 50

Above given schedule shows that people spend on consumption without any income. After increase in income, people start to save some amount of income for further purposes. So, there is direct relationship between income and saving. The saving function can also be shown in figure below:

From above given figure, saving curve ‘SS’ shows that saving tends to increase when the income increases. Likewise, it also shows that saving is negative and zero at low level of income. So, saving curve starts downward from X-axis.

There are various forms of saving, such as average propensity to save (APS) and marginal propensity to save (MPS) which are explained below:

(i)   Average propensity to save (APS):

The ratio of saving and income is known as average propensity to save. APS is the counterpart of the average propensity to consume (APC). It can be expressed as;

APS =Saving/Income =S/Y

or, APS = 1-APC [... APC + APS = 1]

 

 

(ii) Marginal propensity to save (MPS):

Marginal propensity to save is the ratio between the change in saving and change in income. In other words, MPS is the change in saving as a result of change in income. It can be expressed as;

MPS =DS/DY

Where, DS = Change in saving

DS = Change in income

or,  MPS= 1- MPC [\MPS+MPC=1]

It shows the relationship between MPC and MPS. As MPC increases MPS declines and vice-versa, i.e., higher the MPC implies lower the MPS.

 

Determinants of Saving

Saving is an important function of individual and business organization. Everybody likes to save some parts of their income in the view of solving the possible problems that may occur in the future. But main determinant of saving is the level of income. Therefore, the higher the level of income, the higher is the possibility of saving. So, part of the income left over after the consumption expenditure of people is known as saving. The factors, which influence the amount and ratio of saving is called determinant of saving. The factors determining saving can be explained as follows:

(1) Income Level:

            Saving of every individual and business organization depends upon the level of income. Higher the level of income, higher will be the saving. This is because of marginal propensity to consume (MPC) of rich people with high income will be low while the marginal propensity to consume of poor people with low income will be high. Hence, possibility of saving increases as income increase of the people. So, saving is impossible without adequate level of income.

(2) Rate of Interest:

            Rate of interest is also an important determinant of saving. In general, there is positive relationship between saving and rate of interest, i.e., higher the rate of interest results the higher level of saving and vice-versa. Keynes stated the concept that low rate of interest will increase the propensity to consume. This is because people are encouraged to save in order to obtain a high rate while they are discouraged to save with low rate of interest.

(3) Price level:

            The price level of the goods in the market also influences the saving. The consumers may react to any rise or fall in the price level by spending either more or less of their income for goods and services. If the price level is high, less is left for saving. But, if the market price level is low, the consumers can get goods cheaper and increase the saving. Hence, we can say that the condition of inflation is not favorable for saving.

(4) Fiscal Policy:

            The fiscal policy undertaken by the government also affects the saving. If the government increases the tax rate, then propensity to save will decrease. But on the other hand if tax rate is decreased, then the propensity to save of the people will increase.

Fiscal policy adopted by government are of two types, i.e., expansionary and contractionary fiscal policy. Expansionary fiscal policy helps to rise saving where government reduced tax and increase government expenditure. Conversely, contractionary fiscal policy reduces the ratio of saving where government imposes high tax system and reduces the government expenditure.

(5) Distribution of Income:

            Distribution of income and wealth is also important determinants of saving. If distribution of national income and wealth is equal in the society, then the average propensity to consume will be high. But, if distribution of income and wealth is unequal, then average propensity to consume will be low because more part of income will be in the hands of a few people. In such a situation, their average and marginal propensity to consume will be very low.

(6) Social security:

Social security system is also one of the main factors that determines the saving. The rate of saving will be very low in the country where various social security system are fully developed like pension to the retired government personnel, old-age allowance, handicapped and disabled allowance, unemployment allowance, widow allowance, medical insurance, etc. When social and economic security systems are appropriately available, then people will not  be worried about their future and try to enjoy with higher level of consumption,  which reduces saving. But on the other hand, if the government does not provide any kind of social securities in the own securities. For this, they will start saving and this will increase the propensity to save.

(7) Demonstration Effect:

            Demonstration effect is also one of the most important determinants of saving. The more the people get attracted to various advertisements and expensive foreign consumption goods, the more will be the consumption of such goods. This will result in the decrease in saving. On the other hand, if people of a country are not influenced by the demonstration effect, then the saving will be more.

Betides these, the determinants of saving are; the development of banking and financial institutions, government policy of saving, economic structure, peoples desire in improving the living standard, etc.

One thought on “Concept of Saving”

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