Macroeconomic

Project


By Ganesh Kumar
 UNIT - 3

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Saving Function
 Meaning of Saving
Function

 Consumption increases as income increases but less
than the rise in income .
 We will now explain what happens to save when
income increases . Saving is defined as the part of
income which is not consumed because disposable
income is either consumed or saved.
 Thus,
Y = C+S
S = Y- C
where Y = Disposable income , C = Consumption, and
S = Saving
 Concept of Saving
Function

 1. Average Propensity to save: (APS)
An important relationship between income and saving is
described by the concept of average propensity to save.
APS to save is the proportion of disposable income that is
saved(i.e., not consumed ).

2. Marginal Propensity to Save : (MPS)

Marginal propensity to save represents how much of the
additional disposable income is devoted to saving. The marginal
propensity to save is therefore change in saving induced by a
change in the disposable income.
 Saving Function

 Keynes showed that savings are a fuction of Y.
 Not the rate of interest.
 If Y , then S
 Savings is hoarding , money that is taken out of the
Y-stream , and kept by the HH in the form of cash.
 This is also called as Liquidity Preference.
 Saving – Income Relationship


 When Y is zero , consumption cannot be zero ,
consumer will have to borrow or use their past
saving.
 Therefore, when Y is zero , S < 0. This is called
Dissavings.
 As income increase, saving also increase.
 Finally, S = 0, and then S > 0.
 Saving Function

Y=C+S
C, S

S = -Sa + sY

0 Saving > 0
O S=
g
Y1 Y
sa vin
s
Sa Di < 0
S
 Average Propensity to Save


 Average Propensity to save: APS = S/Y
 Saving function is given by: S = -Sa + sY
 Here, Sa is the savings level when Y = 0, and it is
negative , and C > Y.
 When Y increases , C also increases but less than Y,
and C = Y. At this point S = 0.
 At higher incomes, S increases, but less than income.
So S/Y < 1, but positive.
APC + APS = 1
 Marginal Propensity to Save


 MPC = S/ Y = rate of increases in S, due to
increase in Y.
S = -Sa + sY,
MPS = dS/dY = s
 It is equal to the slope of the S-curve.
 On a straight line S-curve, MPS remains constant.
MPC + MPS = 1, or
MPS = 1 - MPC
Capital

Investment
 Capital

 From the economists’ perspective, capital is key to the
functioning of any unit , whether that is a family, a small
business, a large corporation, or an entire economy.
 In the broadest sense, capital can be a measurement of wealth
and a resources for increasing wealth. Individuals hold capital
and capital assets as part of their net worth. Companies have
capital structures that define the mix of debt capital, equity
capital, and working capital for daily expenditures that they
use.
 Capital is typically cash or liquid assets being held or obtained
for expenditures. In a broader sense, the term may be expanded
to include all of a company’s assets that have monetary value ,
such as its equipment , real estate, and inventory . But when it
comes to budgeting , capital is cash flow.
How Capital Is Used

 Capital is used by companies to pay for the ongoing production of
goods and services in order to creat profit. Companies use their
capital to invest in all kinds of things for the purpose of creating
value. Labor and building expansions are two common areas of
capital allocation. By investing capital , a business or individual
seeks to earn a higher return than the capital’s costs.
 At the national and global levels, financial capital is analyzed by
economists to understand how it is influencing economic growth .
Economists watch several metrics of capital including personal
income and personal consumption from the commerce
Department’s Personal Income and Outlays reports. Capital
investment also can be found in the quarterly Gross Domestic
Product report.
 Types of Capital
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 There are top four types of capital that business focus
on in more detail.
 1. Debt Capital
 2. Equity Capital
 3. Trading Capital
 4. Working Capital
 Investment

 Investment involves employment of funds with the
aim of achieving additional income or growth in
values.
 Lending money to another[ interest]
 Purchase of gold [value appreciation]
 Purchase of insurance plan[promised future benefits]

The essential quality of an investment is that it

involves waiting for a reward.
Different Definition of Investment

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 Investment may be defined as…….

“a commitment of fund made in the expectation of

some positive rate of return” OR

it can be defined as………

“ a sacrifice of current money or other resources for

future benefits”.
Types of Investment
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 There are 6 types of investments

1. Stock
2. Bonds
3. Mutual funds
4. Index funds
5. Exchange – traded funds ( ETFs)
6. Options
Characteristics of Investment
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 Risk Factor. Every investment contains certain
portion of risk.
 Expectation of Return. Return expectation is the
main objective of investment .
 Safety. Investors expect safety for their capital.
 Liquidity
 Marketability
 Stability of Income
5 Stages of investing
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 1. Put- and- take Account . This is the first savings
you should establish when you begin making money
 2. Beginning to invest.
 3. Systematic Investing
 4. Strategic Investing.
 5. Speculative Investing.
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Thanks