Lecture on Savings and Its Determinants

May 30, 2024

Lecture on Savings and Its Determinants

Definition of Savings

  • Savings: Portion of disposable income not spent on goods and services.
  • Savings and Aggregate Demand (AD): Savings is a determinant of AD.
    • Increased savings -> decreased consumption -> AD shifts left.
    • Disposable income can only be spent or saved.

Factors Affecting Savings

1. Level of Real Disposable Income

  • Higher real disposable income can lead to increased savings.
  • Important in both developing and developed countries.
  • Poor households save a small percentage due to consumption needs.

2. Interest Rates

  • High Interest Rates: Increase rate of return on savings -> more incentive to save -> increased savings.
  • Low Interest Rates: Encourage borrowing and spending -> decreased savings.

3. Consumer Confidence

  • Low Consumer Confidence: Fear of recession, job loss -> increased savings.
  • High Consumer Confidence: Optimism -> increased spending -> decreased savings.

4. Financial Institutions

  • Better range and trustworthiness of financial institutions encourage saving.
  • In many developing countries:
    • Lack of volume in financial institutions.
    • Corrupt, non-trustworthy, or unofficial banks -> reduced incentive to save.
  • Education about financial benefits also affects saving.

5. Tax Incentives

  • Government policies to promote saving (e.g., ISAs - Individual Saving Accounts).
  • ISAs offer tax-free returns on savings up to a threshold (e.g., £15,500).
  • Such incentives encourage more savings.

6. Age Structure of Population (Modigliani's Theory)

  • Middle-Aged Individuals (30-60): More likely to save for children and retirement.
  • Younger (15-30) & Pensioners (60+): More likely to spend.
  • Population structure affects overall saving levels.

Summary

  • Savings play a crucial role in the economy by influencing consumption and aggregate demand.
  • Various factors such as income, interest rates, consumer confidence, financial institutions, government policies, and the age structure of the population affect saving levels.

Hope this helps! See you in the next video!