Monday, February 15, 2010

Determinants of saving

Every individual will want to save some part of the income in the view of solving the possible problems that may occur in the future. But remain determinant of saving is the level of income of the consumer. Therefore, the higher the level of income of the people, the higher is the saving possibility. So, part of the income left over after the consumption expenditure of people is known as saving. Factors determining saving can be explained as follows:

1. Level of income

The saving of every individual depends upon the level of income. The higher the level of income, the higher is the saving. This is because the marginal propensity to consume of rich people with high income will be low while the marginal propensity to consume of poor people with low income will be high. For this reason, the developing countries with low level of income will have lower marginal propensity to save.

2. Precaution

If people take precautions to tackle the economic problems that may arise in the future, then the current saving will increase. In such a situation, the propensity to consume will decrease.

3. Foresightedness

Some people save for their old-age, for their children’s health and education, for the security of their family etc. this will increase in the saving.

4. Liquid assets

Among various determinants of saving, liquid asset is also a main one. The more the people desire to keep liquid assets, the less will be the saving. This is because liquid assets get spent on various unexpected activities. Just opposite to this, saving will be high if liquid asset with people is less.

5. Fiscal policy

Fiscal policy undertaken by the government also determines the saving. If the government increases the tax rate, then propensity to save will decrease. But contrary to this, if tax rate is decreased, then the propensity to save of the people will increase.

6. Price level

The price level of the goods in the market also influences the saving. The higher the market price, the less will be the saving of the consumers resulting the decrease in the national saving. But if the market price level is low, the consumers can get goods cheaper and increase the saving. So, the price level of the goods also determines the saving.

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