Role of Savings in an Economy

Role of Savings in an Economy

Introduction

In this paper, we will discuss many aspects of which are unknown to many, as it is necessary to know such simple aspects of everyday life which in turn are very confusing. The savings, which is to keep a share of income a person receives, it is important for short or long term future, as these assure us that in future we can enjoy a safety or a luxury or a necessity cover, to provide us with stability and physical and psychological integrity. The rich save more than the poor, both absolutely and in percentage terms. The very poor cannot save anything (Dell'Amore, 1983).

The Savings

Saving is the portion of income that is not consumed immediately. The share of personal income remains intact, that is not available for some time. Income, consumption and saving are closely related. More specifically, the personal saving is the part of disposable income that is not consumed; the savings equals income minus consumption. Personal income consists of wages, interest, rents, dividends, transfers, etc. The personal saving rate equals the personal saving as a percentage of disposable income (Feldstein, 1996).

Economic studies have shown that income is the main determinant of consumption and savings. The rich save more than the poor, both absolutely and in percentage terms. The very poor cannot save anything. The break-even is when the situation is from hand to mouth i.e., the income is just to enough to satisfy the needs (Calavita &Pontell, 1990).

The consumption function and savings function

Saving function shows the relationship between the level of savings and income. This comes directly saving function and is the vertical distance between the line of 45th and the consumption function. If you are above the line for your savings will be negative, if it shows a deficit savings will be positive. The level of production achieved in a given time depends, given the production techniques, the productive capacity of the economy and the employment level of economic resources. Assuming a certain level of employment of resources, and the use of certain means of production, whether the production level achieved and occupation must be maintained, it must increase or decrease, depends on the ratio of total goods and services (total supply) and the expense of society (aggregate total demand). This relationship is one of the pillars, perhaps the principal, on which rests the modern theory of occupation. The aggregate total demand refers its total expenditure of the company in consumer goods and investment goods. Given the important role played by these concepts in the analysis of national income, it must clearly establish that relationship (Calavita, Pontell & Tillman, 1997).

Propensity to save

Keynes suggested that the propensity to save was determined by subjective and objective factors. As subjective factors determining the propensity to save, Keynes mentioned the following: create a reserve to meet unforeseen future situations, the desire to enjoy higher incomes in the future by investing part of current income, the enjoyment of economic and social position ...