Economics is the social science that analyzes the production, distribution, and consumption of goods and services.

Sunday, 18 September 2011

Saving Theory

Saving Theory

Definition: Saving is the conservation of money. Methods of saving include putting money aside in a bank or pension plan. Saving also includes reducing expenditures. Saving includes buying securities and deposits money with financial institutions.

Saving function: S = -a + (1 – b)Yd
S = Saving
a = autonomous consumption
1 - b = MPS
Yd = disposable income

            Average propensity to saving (APS)
The average propensity to save (APS), also known as the savings ratio, is an economics term that refers to the proportion of income which is saved, usually expressed for household savings as a percentage of total household disposable income.

Formula:        APS = Saving (S) / income (Y)

Marginal propensity to saving (MPS)
·         Marginal propensity to saving (MPS) is the relationship between a change in income and corresponding change in saving.

Formula:        MPS = Change of saving (∆S) / Change of income (∆Y)


Determinants of saving

a.Disposable income (Yd)
                As disposable income (Yd) increase, saving will reduce but when income (Y) rises,
                saving also will increase.

                 Wealth means real assets and financial assets which household own. The greater
                 amount of wealth will increasing total of saving.

                Household expectation concerning future prices and availability of goods may have
                  a significant impact on current spending and saving. If individuals expected the
                  general price will increase in the future, they will reserve their money by today
                  (increase saving). 

d.Availability of financial institutions

The more banks and finance companies that exists, the more opportunity
   individuals have to save.

e.Psychological reasons/ habits and customs

   It might be habitual for some to put aside a certain amount a month for a rainy day.
   Some people save more due to habits or customs.