Capital and Savings

What is Capital
• One of the four basic categories of resources, or
factors of production. It includes the
manufactured (or previously produced) resources
used to manufacture or produce other things.
Common examples of capital are the factories,
buildings, trucks, tools, machinery, and
equipment used by businesses in their productive
pursuits. Capital's primary role in the economy is
to improve the productivity of labor as it
transforms the natural resources of land into
wants-and-needs-satisfying goods.
 What is Saving
• The after-tax disposable income of the
household sector that is not used for
consumption expenditures. Savings are money
or other assets kept over a long period of
time, usually in a bank without any risk of loss
or making profit
 Determinants of Saving
• Current Disposable Income
• Accumulated Wealth
• Bank Interest Rates on savings
• Borrowing rates
• Consumerism
• Uncertainities
• Country’s Demographic Profile
• Social security Benefits
• Capital Markets
 Savings
• Savings rate also rose by 9.8% (2003-4 to 2007-8)
– Avg. 33.3% of GDP from 23.6% in previous 5 yrs
• Private and Public
– Increment (4 yrs) 5.1% & 3.4% respectively
– Contributed(60:40)
• Saving Rate: 37.7% of GDP in 2009-10
• Increase of Investment and Saving Rate in last
decade enough to give average growth 0f around
7.5%

02 August 2008 General: AV 5

Private savings in India
 What is Investment
• The sacrifice of current benefits or rewards to
pursue an activity with expectations of greater
future benefits or rewards. Investment is the
mechanism used to increase the economy's
production capabilities and generate
economic growth. Investment is typically used
to mean the purchase of capital by business in
anticipation of profit, which is termed
investment expenditures.
• The economy sacrifices some today to obtain
more tomorrow. In fact, investment is the
general process in which society expands,
improves, and grows. Without investment,
society stagnates and never improves. Without
investment, there is no economic growth.
e.g of Investment:- education(Human Capital),
Scientific research, Public Infrastructure,
Exploration etc.
 Determinants of Investments
• Revenues
• Costs
• Expectations
 Investments in different sectors
Highest for Manufacturing and construction
Followed by storage & agriculture.
• Investment Growth: Manufacturing 30.5% per
year
• Capital stock (end 2007-8 over end 2002-3).
– Construction(1.92 times)
– Manufacturing (1.75 times),
– Hotels & Restaurants (1.62 times).

02 August 2008 General: AV 13

 Difference between Saving and
Investment
• Savings are money or other assets kept over a
long period of time, usually in a bank without any
risk of loss or making profit. Investments are
money or other assets purchased with the hope
that it will generate income, reduce costs, or
appreciate in the future. In an economic sense, an
investment is the purchase of goods that are not
consumed today but are used in the future to
create wealth. These goods are generally referred
as capital Stocks that will further add to
productive resources of the country.
 KEY POINT:

Savings = Household income that hasn’t been spent

Investment = Corporate purchases of capital goods (plant, equipment, etc)

The role of the financial sector is to make funds saved by households available
for firms to borrow for investment activities

Households save their Firms access these

income by opening funds by taking out
savings accounts, loans, issuing stocks
buying stocks and and bonds, etc. and
bonds, etc use the funds for
investment activities

The financial sector handles

these deposits
 Robort Solow:Neo Classical Growth
Model
• Growth depends on capital accumulation - increasing the stock of capital goods to expand
productive capacity
• Net investment and the need for sufficient saving to finance investment
• Higher savings - postponing consumption to finance increased allocation of resources towards
investment
• Capital widening: capital stock rising at rate which keeps pace with labour force growth.
• Capital deepening: capital stock grows faster than labour force. Considered more important.
• Quality of capital goods - improvements due to R&D & innovation
• Solow - a combination of capital deepening & technological improvement explains major trends in
economic growth
• 1. Adding more capital goods to a fixed amount of labour will lead to diminishing returns to
capital.
• 2. Increased capital accumulation drives the rate of return on capital down
• 3. Eventually, the rate of return may be so low that no further net capital accumulation takes place.
• 4. In which case the rate of technological progress determined the rate of growth of output
Technological progress is assumed to be exogenous i.e. lies outside the growth model