Savings
Topic: Aggregate Demand, Income Determination and the Multiplier · NCERT: Class 7, Ch 8 "Banks and the Magic of Finance"; Class 8, Ch 7 "Factors of Production"; Class 12, Ch 4 "Determination of Income and Employment"
Meaning
Savings are the part of income that is not spent on consumption. S = Y − C. The share of extra income that is saved is the marginal propensity to save, MPS = ΔS/ΔY = 1 − MPC. The share of total income that is saved is the average propensity to save, APS = S/Y. In the Keynesian model, planned saving equals planned investment at equilibrium. For one household, saving is prudent. But if everyone saves more at the same time, total income can fall, and total savings may not rise. This is the paradox of thrift.
Example
A family in Pune earns ₹1,000 and spends ₹900, so it saves ₹100. In NCERT's model, C = 40 + 0.8Y and I = 10. At equilibrium Y = 250, C = 240, so S = 10, which equals I.
Don't confuse with
- Investment: saving means not spending income. Investment means adding to physical capital or inventories. The two are equal only at equilibrium (ex ante), or always in the accounts (ex post).
Related concepts
- Consumption function
- Autonomous consumption
- Induced consumption
- Marginal propensity to consume
- Marginal propensity to save
- Average propensity to consume
- Average propensity to save