Saving is the conservation of money. Methods of saving include putting money aside in a bank or pension plan. Saving also includes reducing expenditures. Saving includes buying securities and deposits money with financial institutions.
Saving function: S = -a (1 – b)Yd
S = Saving
a = autonomous consumption
1 - b = MPS
Yd = disposable income
Average propensity to saving (APS)
The average propensity to save (APS), also known as the savings ratio, is an economics term that refers to the proportion of income which is saved, usually expressed for household savings as a percentage of total household disposable income.
APS = Saving (S) / income (Y)
Marginal propensity to saving (MPS)
Marginal propensity to saving (MPS) is the relationship between a change in income and corresponding change in saving.
MPS = Change of saving (∆S) / Change of income (∆Y)
Determinants of Saving
1. Disposable income (Yd)
As disposable income (Yd) increase, saving will reduce but when income (Y) rises, saving also will increase.
2. Wealth
Wealth means real assets and financial assets which household own. The greater amount of wealth will increasing total of saving.
3. Expectations
Household expectation concerning future prices and availability of goods may have a significant impact on current spending and saving. If individuals expected the general price will increase in the future, they will reserve their money by today (increase saving).
4. Availability of financial institutions
The more banks and finance companies that exists, the more opportunity individuals have to save.
5. Psychological reasons/ habits and customs
It might be habitual for some to put aside a certain amount a month for a rainy day. Some people save more due to habits or customs.
