Determinants of Saving in the Economy

Introduction

• Saving: Part of disposable income not spent on goods/services.
• Saving affects Aggregate Demand (AD).
  • Increased saving implies decreased consumption.
  • AD shifts left with increased saving.

Factors Affecting Saving

1. Level of Real Disposable Income

• Higher income: More potential for both spending and saving.
• Without income, saving is not possible.
• Important in both developing and developed countries.
  • Poor households often have low saving rates.

2. Interest Rates

• Higher interest rates: Encourage saving.
  • Higher returns on savings accounts incentivize saving.
• Lower interest rates: Encourage spending over saving.

3. Consumer Confidence

• Low consumer confidence: Encourages saving.
  • Fear of recession, job loss, or income cuts lead to increased saving.
• High consumer confidence: Encourages spending.

4. Financial Institutions

• Developing countries often lack trustworthy financial institutions.
  • Corrupt, unofficial, or unreliable banks deter saving.
• Education on financial benefits and operations is lacking.

5. Government Policies

• Tax incentives: Encourage saving.
  • Example: ISA (Individual Savings Account) allows tax-free returns on savings.
• Policies that promote saving can increase overall saving levels.

6. Age Structure of Population

• Middle-aged individuals: More likely to save for retirement and children.
• Younger individuals (15-30) and pensioners (>60): More likely to spend.
• Modigliani's thesis: Middle-aged population leads to higher savings.

Conclusion

• Various factors influence saving behavior in an economy.
• Understanding these can inform policies to manage saving and consumption effectively.

Note: The lecture emphasizes understanding saving's role in economic dynamics and the importance of reliable financial systems and policies.