Saving

Saving is defined as the excess of income over consumption expenditure (i.e. S = Y-

C). It is the part of income which is not spent on consumption. Saving depends on
income and higher the income, higher will be the saving and vice-versa. Various
economists have defined saving in different ways.
Robertson defines, "Current saving is a function of past income. It is the difference
between yesterday's income and today's consumption
According to Keynes, "current saving is the difference between current income and
current consumption." In other words, current saving is a positive function of
current income.
Saving Function
Saving function or the propensity to save expresses the relationship between saving and the
level of income. Saving function establishes functional relationship between income (as an
independent variable) and saving (as a dependent variable). It shows how saving varies with
given changes in income. It is simply the desire of the households to hoard a part of their total
disposable income. There is positive relationship between saving and income. It means that the
higher the income, the higher will be saving and vice-versa. Symbolically,
S = f (Y) f’>0
If the slope of saving curve remains constant throughout its length, it is said to be linear saving
function. In other words, if both saving and disposable income changes at a constant rate,
saving function will be linear. Mathematically, it can be written as
S = Y-C
or, S = Y -(a+bY)
or, S = - a+(1-b) Y
where,
C= a+by
1-b = s
s = b = Marginal propensity to consume
Y = Level of income
S =Saving
C = Consumption
-a = Saving at zero income
Saving Schedule & Saving Curve
 Technical Attributes of Saving
Average Propensity to Save (APS)
Marginal Propensity to Save (MPS)
It is the ratio between total saving and total income. When both income and consumption MPS is the ratio of change of saving resulting from one-unit change in income. It is expressed
increase at constant rate, saving also increases at constant rate. Hence, APS increases as the ratio of change in total saving to the change in total income. It can be expressed as,
continuously. It is expressed as; MPS = ∆S /∆Y
Where,
APS= S/Y
∆S = Change in saving ∆Y = Change in income
Where, MPS is always between 0 to 1.
S = Saving Y = Income 0 < MPS < 1
APS is always positive, i.e. APS > 0. We know that
Y = C + S ------------------------- (i)
We know that
or,
Y=C+S Y+∆Y = (C+∆C) + (S+∆S) ----------- (ii)
Dividing both sides by Y, we get From equation (ii) - (ii), we get
Y/Y = C/Y + S/Y ∆Y=∆C + ∆S
Dividing both sides by ∆Y, we get
or, 1 = APC + APS
∆Y/∆Y = ∆C /∆Y + ∆ S/∆Y
or, APC+APS=1 or, 1 = MPC + MPS
or, APS= 1-APC MPS=1-MPC
Types of Saving
Personal or individual saving
Saving made by an individuals and households is known as personal saving. They save some
part of their present income by curtailing their present consumption to use it in future.
Corporate saving
The saving made by business firms is known as the corporate saving or business saving.
Business firms save their present profit for the expansion and development of the firm in future.
Compulsory saving
Compulsory saving is enforced to reduce consumption. The government may sometimes compel
the people to curtail their current consumptions and increase savings. For this, the government
may impose additional taxes to the goods and services. The consumer goods become expensive
due to additional taxes. As a result, people are compelled to curtail consumption.
Forced saving
Sometimes, the government compels individuals to save their current income by curtailing the
consumption to invest in the government securities or bills. These types of savings are known
as forced savings. By reducing the consumption of goods, the resources available in the hand
of people can be used for the production of capital goods.
Government saving
When the income of the government is in excess to government expenditure, it results in
government savings. This saving is related to the government offices, Generally, this type of
saving cannot be found in the developing countries like Nepal.
Determinants of Saving
Level of income
Income is the main source of saving. Saving is positively related with income i.e. higher the
income tends to higher level of saving and vice-versa. Hence, possibility of saving increases as
income of the people. When income becomes very low, then people can't e because they can't
cover even their minimum basic requirement. So, increases saving is unable to imagine without
adequate level of income.
Rate of interest
Rate of interest is also an important determination of saving. It takes positive relation with
saving i.e.; higher the rate of interest results the higher level of saving and vice-versa. When
the rate of interest increases then people reduce their normal consumption and try to save. On
the contrary, people used to save less, when the rate of interest decreases.
Distribution of wealth and income
Saving is also determined by the way in which national income and wealth is distributed
among different persons in a country. According to Edward Shapiro, "In general, the more equal
distribution of income, the larger the fraction devoted to consumption tends to be." This implies
that unequal distribution of income and wealth increases saving.
Demographic factors
The age composition of population also affects the saving. The more the dependent population
in the country, the less will be saving. The reason is that the larger number of dependents needs
more money to fulfill their requirements. Dependent population means those who cannot earn
themselves and have to depend on others.
Determinants of Saving………..
Price level
The price level of the goods and services in the market also affects the saving. The higher the
market price, less will be the saving of the people. On the contrary, if the market price level is
low, people can get goods and services cheaper, and it raises saving in the society.
Fiscal policy
The fiscal policy of the government affects the private saving largely. If the government raises
the tax rate, the income of the people remaining constant, propensity to save will decrease.
Contrary to this, if the government reduces the tax rate, propensity to save of the peop le will
increase.
Development of banking and financial institutions
The development of banks and financial institutions also play important role to determine
savings of people. The development of such institutions provides various facilities and attracts
them to save their income in these institutions.
Social security
Social security is also one of the important factors that influence the saving. If the government
provides adequate social security to the people, such as pension, old age allowance,
handicapped and disabled allowance, unemployment allowance, widow allowance, etc.,
people would feel fully secured for the future and will not be encouraged towards saving. On
the other hand, if the government does not make any provisions for the social security in its
budget, people have to manage themselves for their future security. This forces them to save
more and more for their future.
Paradox of Thrift (Saving is a Vice not a Virtue)
The paradox of thrift (or paradox of saving) is a paradox of economics. The paradox states that
an increase in autonomous saving leads to a decrease in aggregate demand and thus a
decrease in gross output which will in turn lower total saving. The paradox is, narrowly
speaking, that total saving may fall because of individuals' attempts to increase their saving,
and, broadly speaking, that increase in saving may be harmful to an economy. The paradox of
thrift is an example of the fallacy of composition, the idea that what is true of the parts must
always be true of the whole. The narrow claim transparently contradicts the fallacy, and the
broad one does so by implication, because while individual thrift is generally averred John
Maynard Keynes, who published his influential work, The General Theory of Employment,
Interest, and Money, in 1936, noted saving can ultimately be detrimental to the economy
because of the paradox of thrift. This theory argues that if everyone individually cuts spending
to increase saving, aggregate saving will eventually fall because one person's spending is
someone else's income. Because increased saving, by definition, decreases current
consumption, it stifles demand.
Thriftiness indicates the tendency of saving more. The classical economists regarded saving as
a great virtue. They encouraged people to spend less and encouraged thriftiness or saving.
According to them, the investment was determined by the saving. They were of the view that
individual saving would be turned into national saving and this national saving would be turned
into national investment, which would lead to rise in national income.
The classical economists regarded saving as a virtue. They believed that saving led to good
management of economy and hence they encouraged people to save more. To be precise,
classical economists regarded that aggregate investment was greatly influenced by aggregate
saving because if people start to save more than it would increase national saving, increasing
national investment which ultimately led to rise in income of the nation.
Paradox of Thrift (Saving is a Vice not a Virtue)……..
On the other hand, Keynes, the father of modern economics, believed that saving was vice and
not a virtue. Although saving may be a virtue for an individual, but it is a vice for the public. It
is because the expenditure of one person becomes the income of another. When one person
saves, the income of another person declines.
The logical explanation behind saving being a vice is that, when aggregate saving increases,
aggregate consumption decreases, causing a fall in the effective demand in the economy.
Decrease in effective demand leads to over production in the market, and to maintain a
balance, firms start producing less. It results in reduced investment. Similarly, decrease in
effective demand reduces price as well as profit, discourages investment. Subsequently, there
will be decline in employment, declining saving itself.
In this way, saving, which is beneficial at a personal level actually becomes disadvantageous
at public and national level. This phenomenon is referred as the “paradox of thrift”.
According to Keynes, if all the amount of saving is invested, it does not reduce total effective
demand. If all the amount of saving is not invested, more saving reduces the level of income as
well as saving. "Keynes argues that when an individual has saved his income, it will reduce his
consumption. Due to reduction in consumption, aggregate demand also declines and it creates
deficiency in effective demand. As a result of this process, employment, output, profit and
income would decrease. Such activities will further reduce the society's saving. Thus, saving
may be virtue for an individual because it helps to increase his/ her wealth but it is evil(harmful)
for the society because it reduces the income as well as saving of the society. Expenditure of
one person (consumer) is the income of another person (producer). Therefore, saving done by
an individual lead to reduce income and expenditure of others. This will reduce price, profit,
and discourage investment consequently, income, output, employment and saving itself will
decline. Hence, the private virtue like saving may be a public vice (unemployment). The
thriftiness or saving produces poverty not wealth. This is the paradox of thrift.
Graphical illustration and Explanation of Paradox of Thrift
Graphical illustration and Explanation of Paradox of Thrift

In the figure, we measure income along the X-axis and savings and investment along the Y-axis. SS and
II are savings and investment curves respectively. These curves intersect at point E. At this point, saving
is OS and investment is YE. Both are equal, i.e. YE = OS Hence, E is the point of equilibrium. OY is the
equilibrium level of income at the equilibrium point E.
Now suppose that saving increases and the saving curve shifts upward or leftward in the form of S1S1
then E1 is the new equilibrium point and income decreases to OY1. Similarly, the amount of saving has
also declined from OS to OS1. Thus, an effort to save more has led to the decline in income and saving.
In this way, if the amount of saving is increased in the beginning, assuming income constant, all the
consumption expenditure, production, employment, income, etc. start to fall and finally the amount of
savings itself starts to fall. On the other hand, if the amount of saving is decreased in the beginning, it
increases all the consumption expenditure, production, employment, income, etc. Finally, the saving
starts to increase. This is the paradox of thrift, the situation of final reduction in saving from the habit
of not spending income.
But paradox of thrift is valid only in period of depression because at that time people are not willing to
invest. The main cause of paradox is lack of investment. In normal economic condition, when saving is
used for investment, it will be converted into capital and hence the rise in investment which leads to rise
in aggregate demand. So productive saving does not reduce the level of income, employment
consumption and output etc. only idle saving reduces the consumption, demand, output, employment
and income etc.