SAVINGS AND INVESTMENT

Learning outcomes:
1. Concept of Savings
2. Determinants of Savings
3. Savings Function
4. Concept of Investment
5 Determinants of Investment
6. Types of Investment
Savings :
Savings means the amount of money or worth
left over after spending and other obligations
are deducted from income/earnings.
We know,
National Income=Consumption+Savings
or, Y=C+S
or, S=Y-C
ie, Savings=NI-Consumption cost
Determinants of Savings :
1.Income
2.Propensity to save
3.Price level
4.Rate of interest
5.Expectation
6.Social Security
7.Habit of festival
8.Developed Banking system
9.Propensity of Consumption
10.Human resources
SAVINGS FUNCTION :
Savings function means the relationship between income and savings. There
are positive relation between income and savings. If the income increase, the
savings will increase, the savings will increase and vice versa . So the slope of
savings function is positive and the savings line upward from left to right.
S=f(Y)
S= -a+dY
Two types of savings function:
1)Short-run Savings function..... S= -a+dY
2)Long- run Savings function.......S= dY
We get savings function from consumption function:
Let a Consumption function -
C= a+ bY ; a=autonomous consumption
b = Marginal propensity of consumption
We know, Y = C + S
or, S = Y- C
or, S = Y – a – bY
or, S = -a + (1-b)Y
or,S = -a + dY ; Where, 1-b = d
AVERAGE PROPENSITY OF SAVINGS/ APS :
APS is the ratio of total savings and Income. It is
calculated by dividing total savings by income level.
Usually , disposable is used.
So, APS= Savings/ Income= S/Y

MARGINAL PROPENSITY OF SAVINGS (MPS) :

Marginal propensity of savings (MPS) is the proportion
of an increase in income that gets saved instead of spent
on consumption. MPS varies by income level and is
typically higher at higher incomes.
S dS
MPS = MPS =
Y dY
Relation between APC and APS :

APC+ APS =1

Relation between MPC and MPS:

MPC+ MPS = 1
 INVESTMENT :
Investment means an addition to the nation’s physical stock of
capital like the building of new factories , new machines, as well
as any addition to the stock of finished goods or the goods in the
pipelines of production.

DETERMINANTS OF INVESTMENT:
1. Level of income
2.Rate of interest
3. Cost of construction
4. Population
5. Mentality of high standard of living
6. Loan facilities
7. Income distribution
8. Technological progress
9. Human resources
10. Socio- economic infrastructure
11. Political stability ...etc
TYPES OF INVESTMENT:
On the basis of income, the investment are two types:
i) Autonomous Investment
and ii)Induced Investment

Some other Investment on the basis of investment cost

and other factors:
1. Inventory Investment
2. Fixed Investment
3.Actual Investment
4.Planned Investment
 CAPITAL:
In economics , Capital or Capital goods are those durable
produced goods that are in turn used as productive inputs
for further production of goods and services . At the
macro economic level , the nation’s capital stock includes
buildings, equipment , machinery , factory, software,
intellectual property like patents, person’s financial assets
and inventories during a given year .
Relation / difference between Capital and Investment :
Capital is a source of finances, whereas investment is the
use of funds. Capital is a concept of stock on the other
hand investment is a concept of flow. Therefore , it is not
the same between capital and investment. Since capital is
something to put in the earlier of the business. While after
that , the use of this capital can be defined as an
investment.
CHOICE OF PROJECT FOR INVESTMENT DICISION:
The main aim of an investor is to earn maximum profit
. On this way an investor takes his/her decision of
investment where profit is maximum.
There are some methods/criteria for choice of project.
Such as-
1. Total present Value method. (TPV Method)
2. Net Present Value method. (NPV Method)
3. Internal Rate of Return method. (IRR Method)
4. Marginal Efficiency of Capital method. (MEC
Method)
5. Pay Off Period method
The NPV and MEC Methods are mostly used to choice
investment project.