Economics » National Income » The Concepts of Consumption, Investment, and Savings

Savings

Savings:

This is the part of disposable income which is not consumed. It is disposable income less consumption expenditure. This is calculated as

S = Yd – C

where S is saving, Yd (disposal income) and C (consumption expenditure).

The Saving Function:

This is also a functional relationship between savings and disposable income. The saving function complements the consumption function because disposable income is either consumed or saved. There are two main components of the saving function: autonomous saving and income-induced saving. Below is the saving function that complements the consumption function specified above.

S = – a + (1 – b) Yd                – a < 0; 0 < (1 – b) <1

where: “a” is the non-income induced saving or autonomous saving that is, saving at zero level of disposal income (dis-saving).
         “(1-b)” is the Marginal Propensity to Save (MPS).
         “(1-b) Yd” is the income-induced saving.

Fig. 11.3: Saving Function

Figure 11.3 shows the saving function which relates saving to the level of disposable income in the form S = – a + (1 – b) Yd.


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