Saving Function
Meaning of Saving.
Saving is defined as the excess of income over consumption expenditure. 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.”
Saving Function
Saving function establishes a functional relationship between income (as an independent variable) and saving (as a dependent variable). It shows how saving varies with a given change in income. in other words, it shows a schedule showing various amounts of saving corresponding to the different levels of income.
Mathematically,
S=f(Y)
where.
S= saving, f= function and Y= income.
Technical Attributes of Saving Function
It has the following technical attributes of saving function.
(1) Average Propensity to Save (APS):
The average propensity to save refers to the ratio of total savings to a given level of total income. Symbolically, APS = S÷Y.
(2) Marginal Propensity to Save (MPS):
The marginal propensity to save is the complement of the marginal propensity to consume so that MPC + MPS =1. The marginal propensity to save is expressed as the ratio of a small change in saving to a small change in income (MPS = ∆S÷∆Y).
Relationship Between APC and MPC, APS and MPS
• Short-run consumption function is considered as non-proportional consumption function. Hence, APC>MPC at all levels of income, but APS<MPS.
• Since, APC+APS=1. This expression implies that if APC decreases steadily as disposable income increases APS must increase steadily as income rises.
• If autonomous consumption is zero, all values, i.e. APC, MPC, APS, and MPS remain constant, positive and less than one.
Linear saving function
If the slope of the saving curve remains constant throughout its length, then it is called linear saving function. It can be derived as linear from with the help of linear consumption function.
Since S=Y-C
or, S= Y-(a+bY)
or, S=Y-a+bY
where,
S= saving
-a=Y- intercept or autonomous saving,
1-b= marginal propensity to save,
Y= total disposable income.
Types of Saving
Saving can be classified into the following groups:
1. Personal Saving: Saving made by individuals for their own personal reasons.
2. Corporate Saving: Saving made by companies as a form of retained earnings and depreciation.
3. Government Saving: It is the difference between net government receipts minus government consumption expenditure.
4. Forced Saving: Forced saving which occurs in mild inflation because it will bring about a reduction in the demand for consumer goods.
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