Relationship between disposable income and savings

Relationship between Disposable Income and Consumption

relationship between disposable income and savings

Saving is that part of income which is not spent on current consumption. The relationship between saving and income is called saving function. Simply put. The Savings Function shows the relationship between savings and disposable income. As with consumption, we will assume that this relationship is linear. Dr. W. S. Woytinsky attacks the statistical relationships between consumers' expenditures. (or savings) and the disposable income of in- dividuals indicated in .

Many governments also produce savings data for households alone. The household savings ratio is household savings as a percentage of household disposable income. Household savings ratios vary widely between countries. For example, in net household savings were 4. There are a number of reasons for this.

ECON Macroeconomics

As far as definitions are concerned, the calculations depend on the treatment of consumer durables, private pensions and life insurance payments, social security, household interest payments, capital transfers and depreciation.

Adjusting for such factors reduces the gap between Japan's and the US's savings ratios by around 3 percentage points. Other factors which account for a large part of the remaining difference between the Japanese and US ratios include the age structure of the population and the labour force; the distribution of incomes; the availability of consumer credit; the tax treatment of savings; the social security system; and economic factors.

It is important not to confuse personal savings with gross national savings.

Relationship between Disposable Income and Consumption

Gross national savings Savings deferred consumption affect investment the basis for future output and consumption. For the economy as a whole it is the gross national savings rate which is important: Any change in disposable income will move you along the Functions.

Return to the course in I-Learn and complete the activity that corresponds with this material. The Interest Rate — Investment Relationship The second component of aggregate expenditures that plays a significant role in our economy is Investment. Remember from our lesson on National Income Accounting that investment only occurs when real capital is created.

Saving Function of Income: Meaning and Relationship between Saving and Income

Investment is such an important part of our economy because it affects both short-run aggregate demand and long-run economic growth. The dollars spent on the investment have the immediate impact of increasing spending in the current time period. But because of the nature of investment, it has a long-term impact on the economy as well. If a company buys a new machine, that machine is going to operate, continue to produce, and will have an impact on the productive capacity of the economy for years to come.

relationship between disposable income and savings

This is in contrast to consumption purchases that do not have the same impact. If you buy and eat an apple today, that apple does not continue to provide consumption benefits into the future.


Before the investment takes place, firms only know their expected rate of return. Therefore, investment almost always involves some risk. Consider the following scenario. You know that your equipment is slow and outdated. You also know that investing in modern computerized printing presses will yield a positive return for your business, but that they will be very expensive.

In order to undertake the investment in new equipment, you will have to borrow the money. Should you borrow the money and buy the new equipment? What will influence you decision?

relationship between disposable income and savings

The key variable that will help you to decide whether the investment makes sense for you is the real interest rate that you will have to pay on the loan.

If the expected rate of return in greater than the real interest rate, the investment makes sense. The difference between income and consumption is how much is spent and left over as savings at the end of the month. There are many factors that determine why consumers choose to spend more on goods not required for day-to-day living expenses. These include stock market trends, tax laws, and even consumer optimism. Economic experts look at historical data to predict future trends based on new market conditions.

The Effect of Consumer Confidence Consumers won't spend money unless they are confident in their personal economic situation and strength. This means consumers feel good about having and keeping a job with the potential of promotion.

Pay increases, stock portfolio rises and tax cuts can put more money in each person's pocket. As these conditions merge, consumer confidence increases.

Consumer confidence is the trust a buyer has that he can afford a purchase either today or in the near future.

For example, consumer confidence is shown by homebuyer trends. This is a major purchase that takes decades to pay off.