Consumption and Savings

8 Key excerpts on "Consumption and Savings"

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  The Economic Organization of the Household

  • W. Keith Bryant, Cathleen D. Zick(Authors)
  • 2005(Publication Date)
  • Cambridge University Press

    (Publisher)

  In this, our first examination of the consequences of decision making over time, we will concentrate on the household’s aggregate consumption and saving decisions: how much of current resources is devoted to present consump-tion and how much is used to pay for either past or future consumption. Consequently, both borrowing and lending will be analyzed because they are the principal ways by which households are able to transfer resources from one period to another. In brief, each household must decide what fraction of its current resources it will consume and what fraction it will save. Consumption and Saving 87 But what is consumption and what is saving? We need accurate defi-nitions of these two concepts and a better understanding of how each is carried out. Definition : Consumption is an activity in which goods are purchased and yield satisfaction in the current period. Food purchased and consumed today is consumption. The purchase and use of a theater ticket or electricity today is consumption. What about purchases and use of CDs or clothing today? Certainly, consumption is involved because resources are being expended today that yield satis-faction today. But because the CDs can be listened to and the clothes worn tomorrow, too, resources are also being expended today that yield satisfaction tomorrow. This is the essence of saving. Definition : Saving is an activity in which resources are used in the current period and yield satisfaction in future periods. Purchases of CDs and clothing are examples of activities that are simul-taneously consumption and saving. So is the purchase of a car or other durable good. 1 Pure saving occurs when households use some of their current resources to increase their bank balances, buy stocks and bonds, or lend money to an individual or firm. Indeed, increasing their bank bal-ances is, in reality, simply lending money to the bank.

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  The Economics of Adjustment and Growth

  Second Edition

  • Pierre-Richard Agénor, Pierre-Richard Agénor(Authors)
  • 2004(Publication Date)
  • Harvard University Press

    (Publisher)

  Chapter 2 Consumption, Saving, and Investment If people regarded future benefits as equally desirable with similar benefits at the present time, they would probably endeavour to distribute their pleasures and other satisfactions evenly throughout their lives. They would therefore generally be willing to give up a present pleasure for the sake of an equal pleasure in the future, provided they could be certain of having it. But in fact human nature is so constituted that in estimating the “present value” of a future benefit most people generally make a second deduction from its future value, in the form of what we may call a “discount,” that increases with the period for which the benefit is deferred. One will reckon a distant benefit at nearly the same value which it would have for him if it were present; while another who has less power of realizing the future, less patience and self-control, will care comparatively little for any benefit that is not near at hand. Alfred Marshall, Principles of Economics , Book 3, Chapter 5, 8th ed., 1920. Consumption expenditure accounts for a large fraction of private spend-ing in developing countries; understanding its determinants is thus important for short-and long-run economic analysis. The fraction of income that is not spent, domestic saving, plays an essential role as well: it continues to finance a large share of domestic investment in most developing countries. As discussed in Chapter 10, saving and investment rates are strongly correlated over time and across countries with rates of economic growth. From a policy perspec-tive, understanding the patterns and determinants of consumption, saving, and investment may thus be a crucial step in designing programs aimed at raising standards of living. Figure 2.1 shows the evolution of domestic saving and investment rates around the world during the period 1976-2001. The data suggest that gross domestic saving rates in East Asia have remained significantly higher than those 28

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  The Chinese Macroeconomy and Financial System

  A U.S. Perspective

  • Ronald M Schramm(Author)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  Given the accounting identity above, a change in disposable personal income would exactly be matched by a change in savings for any given level of consumption. Moving from accounting to theory, the Keynesian approach posits consumption being positively related to disposable personal income as is savings. As we shall discuss later, from a theoretical perspective, savings and consumption are more likely to be directly related to disposable personal income when constraints exist on spending current wealth, or borrowing against current wealth or future income. Classical economists had earlier emphasized the role of interest rates in determining savings since income was generally taken as a given at full employment. In the event, disposable personal income, interest rates, and consumption are three key variables that both theoretically and empirically help to determine the level of savings.

  Life Cycle, Permanent Income, and Wealth Effects

  More modern theories emphasize the role of savings as a means to an end—where the ultimate goal is a smooth pattern of consumption over either a finite horizon (typically an assumed lifetime) or an infinite horizon for a representative agent. These theories of savings emphasize savings in its role as smoothing consumption either in the short term or the longer term. In other words, savings act as a buffer to either unanticipated shocks to income or anticipated long-run changes in income. Most important to consider are the types of income (temporary or permanent) and the actual or projected income earned by different demographic groups for a given economy. This approach allows for more comprehensive theories of savings. Temporary changes in income have a smaller impact on consumption than do permanent changes (Friedman’s permanent income hypothesis (PCH)) and so, for example, a temporary increase in income will tend to be saved—so as to maintain a smooth (balanced) consumption pattern over time. This approach helps explain the smoothing of consumption over the short run when income experiences random shocks.

  In Modigliani’s life cycle hypothesis (LCH), an individual recognizes three ages of man— youth, working age, and retirement.5

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  The Economics of Household Consumption

  • Sanghee Sohn Cha, Young Sook Chung, Frances Magrabi, Se Jeong Yang(Authors)
  • 1991(Publication Date)
  • Praeger

    (Publisher)

  Burk stated that con- sumption economics is an interdisciplinary area of study concerned with allo- cation of resources to satisfy wants, accomplished through the choice and use of commodities by households (1968, pp. 3-13). She identified five dimensions of consumption economics: (1) behavioral, drawing on concepts and variables of the behavioral sciences; (2) economic, with a focus on the economic problems of maximizing utility or minimizing cost; (3) technical, in that it must take into account technological relationships involved in production and distribution as well as the technical characteristics of the goods themselves as inputs in the process of producing utility; (4) temporal, in that it is concerned with both relationships in a static situation and change; and (5) aggregative, in the sense of being concerned both with the individual household and with aggregate data about population groups. In 1977 a committee of professionals working in the field (North Central Regional Research Committee on Family Economics, NCR-52) differentiated consumption economics, which they defined as macro- and microanalysis of household consumption patterns and behavior, from family economics, which they defined as the study of determinants of level of living and possibilities for change, and consumer economics, the study of economic interactions of con- sumers with their external environments (Magrabi, 1984). We will regard consumption economics as encompassing the acquisition, use, and disposal of goods and services by households. We recognize it to be a stage in a process, which means that we must be concerned with its relation to adjacent stages. Samuelson's definition implies a three-stage process, in which resources (human resources or labor, technology, land, and capital goods) are used to produce goods and services, which in turn are acquired by households and then consumed. The technical relationship among these stages is clear.

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  Macroeconomics

  A Contemporary Introduction

  • William A. McEachern(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  We then see how a change in the economy’s price level affects aggregate spending. All this is aimed at getting to the economy’s aggre- gate demand curve. In the next chapter, we develop the aggregate supply curve and see how the two curves interact to determine the economy’s equilibrium levels of price and output. Topics discussed in this chapter include: • Consumption and income • The consumption function • Marginal propensity to consume • Marginal propensity to save • Life-cycle model of consumption and saving • Income-expenditure model • Aggregate expenditure line • Simple spending multiplier • Aggregate demand curve 9-1 Consumption What if a college friend invited you home for the weekend? On your first visit, you would get some idea of the family’s standard of living. Is their house a mansion, a modest rental, or in between? Do they drive a new BMW or take the bus? The simple fact is that consumption tends to reflect income. Although some people can temporar- ily live beyond their means and others still have the first nickel they ever earned, in general, consumption depends on income. The positive and stable relationship between consumption and income, both for the household and for the economy as a whole, is a fundamental point of this chapter. A key decision in the circular-flow model developed three chapters back was how much households spent and how much they saved. Consumption depends primarily on income. Although this relationship seems obvious, the link between consumption and income will help you understand how the economy works. Let’s look at this link in the U.S. economy over time. 9-1a Consumption and Income Exhibit 1 shows the relationship between consumption and income in the United States since 1959; disposable income is measured along the horizontal axis and consump- tion along the vertical axis. Notice that each axis measures the same units: trillions of Copyright 2017 Cengage Learning.

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  Shaking the Invisible Hand

  Complexity, Endogenous Money and Exogenous Interest Rates

  • B. Moore(Author)
  • 2006(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  3. When income is defined in the Hicksian sense to include capital gains and losses, and saving is defined as “income not consumed,” saving is equal to the change in net worth measured at current market values. It then immediately becomes clear why there is no behavioral “savings function,” either for individual units or for the economy. From the point of view of National Income, most house- hold volitional “saving” does not represent “saving” in the National Income Accounting sense. Most “saving” by wealth-owners defined as “income not con- sumed” constitutes the purchase of previously existing and not newly created assets. The result of portfolio transactions is the redistribution of wealth owner- ship. As such they are portfolio transactions and properly recorded as “Asset Purchases and Sales” in the Flow of Funds Accounts, not as “Saving” in the National Income Accounts. Investment may be defined as the net change in capi- tal assets measured at current market value. Saving and investment then include real capital formation plus the appreciation of asset prices. 4. Household “saving,” defined as the accumulation of real or financial assets, constitutes current “saving” for the economy only to the extent it finances (a) current investment spending (the purchase of currently produced real capital goods), and (b) the purchase of newly issued financial assets that directly finance current investment spending by deficit spending units. 5. The production and sale of currently produced goods take calendar time. Bank lending provides firms’ with increased working capital to finance increased purchases of factors of production and inventory accumulation during the production-sales period.

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  Economics

  Principles & Policy

  • William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
  • 2019(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Although it is true that income determines consumption, the consumption function in turn helps to determine the level of income. If that sounds like circular reasoning, read the next chapter! Summary 1. Aggregate demand is the total volume of goods and ser- vices purchased by consumers, businesses, government units, and foreigners. It can be expressed as the sum C + I + G + (X – IM), where C is consumer spending, I is investment spending, G is government purchases, and X – IM is net exports. 2. Aggregate demand is a schedule: The aggregate quantity demanded depends on (among other things) the price level. But, for any given price level, aggregate demand is a number. 3. Economists reserve the term investment spending to refer to purchases of newly produced factories, machin- ery, software, and houses. 4. Gross domestic product is the total volume of final goods and services produced in the country. 5. National income is the sum of the before-tax wages, interest, rents, and profits earned by all individuals in the economy. By necessity, it must be approximately equal to domestic product. 6. Disposable income is the sum of the incomes of all indi- viduals in the economy after taxes and transfers. It is the chief determinant of consumer expenditures. 7. All of these concepts, and others, can be depicted in a circular flow diagram that shows expenditures on all four sources flowing into business firms and national income flowing out. 8. The close relationship between consumer spending (C) and disposable income (DI) is called the consumption function. Its slope, which is used to predict the change in consumption that will be caused by a change in income taxes, is called the marginal propensity to consume (MPC). 9. Changes in disposable income move us along a given consumption function. Changes in any of the other vari- ables that affect C shift the entire consumption function.

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  Macroeconomics for Managers

  • Michael K. Evans(Author)
  • 2008(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  Out of that maelstrom, Keynes developed his theory that as income rose, consumption also rose, but at a slower rate. Thus, he said, as income increased over time, the percentage gap between income and consumption would also widen. If that increased saving was not translated into investment, the economy would falter. Only the government, said Keynes, could pick up the slack. As a result, govern- ment spending would have to rise as a proportion of GDP in order to pull the economy out of perpetual stagnation. Except for the part about consumption being related to income, this simple Keynesian theory is wrong on all accounts, bearing as it does a great resemblance to the claims of the discredited underconsumptionists. For if this hypothesis were true: • Consumption would not rise as fast as income over time, and the personal sav- ing rate would increase over time. Yet the saving rate shows no upward trend, and may have declined over the past two decades even when it is measured correctly. • Consumption would be a function only of income, with financial variables play- ing an unimportant or negligible role in decisions to spend or save. Yet most short-term fluctuations in consumption are related to monetary factors. • The saving rate would decline in recessions. Yet it invariably rises. • Rich people would save a larger proportion of their income than poor people, because the saving rate rises as income rises. Yet in the long run, studies show that both rich and poor people save the same proportion of their average income. The Time-Series Cross-Section Paradox Figure 4.6 shows that consumption has been very highly correlated with income for the past 50 years; the key finding is there is no sign of a widening gap. Figure 4.7 shows that the gap between consumption and income varies cyclically over time.

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