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Saving Function

 Saving Function

Meaning of Saving Function

Saving function is generally denoted as the divergence of income and consumption: S = Y – C, where S is saving, Y is income and C is consumption. Therefore, the level of saving is based on the level of income.

Illustration 41

The below given tablet presents the income and consumption with which, you are required to ascertain the following.

  1. Average Propensity to Save
  2. Marginal Propensity to Save
  3. Relationship between income and consumption and also present graphically the relation among income and consumption

Income Y
$

Consumption C - $

(A)

(B)

0

40

120

140

240

240

360

340

480

440


Solution

Income Y
$

Consumption C - $

Saving S
$

APC = C / Y

APS = 1 - APC

MPS = ΔS / ΔY

(A)

(B)

(C) = (A) – (B)

(D)

(E) = 1 - (D)

(F)

0

40

-40

-

-

-

120

140

-20

1.16

-0.16

0.16

240

240

0

1

0

0.16

360

340

20

0.944

0.06

0.16

480

440

40

0.916

0.08

0.16

Association between Saving and Income

Column (C) of the table depicts that when income is zero or very low, people have no saving capacity i.e. minus 40 or minus 20 millions. They have to consume even if they have no revenue or their capacity of consumption is more their actual revenue, i.e. 140 millions consumption against 120 millions.

When income 40 millions parities consumption expenditure of 140 millions, savings equals to none. As income hikes additionally by $120 millions, their savings hikes by $20 millions. It depicts that as income hikes; savings also hikes but considerably less.

The association between saving and income is called propensity to save or the saving function. It is represented as S = f(Y). Therefore, the saving function indicates a functional association between S and Y, where S is the dependant and Y is the non-dependant variable.

This association depends on the hypothesis “other things being equal” which means that all manipulation on savings are held invariable and that income and saving hike by an invariable amount, that is income hikes by $120 millions and saving by $20 millions as represented in the table.

                                   

The propensity to save curve is shown in the diagram, where earnings is presented on the horizontal axis and saving on the vertical axis. The whole S curve with a particular place and incline is the propensity to save curve. The diagram depicts that below point Y, savings are negative for the reason that people don’t save. At Y, savings hikes with the hike in earnings. The S curve is linear that is straight line for the reason that the hike in earnings is at invariable rates ($120 millions and $ 20 millions correspondingly.

The propensity to save is of two kinds and they are (1) Average Propensity to save and (2) Marginal Propensity to Save.

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