In view of the coronavirus pandemic, we are making LIVE CLASSES and VIDEO CLASSES completely FREE to prevent interruption in studies
Home > Fundamentals of Economics and Management - CMA > National Income > Concept of Consumption, Saving and Investment
National Income

Concept of Consumption, Saving and Investment

Economic development of a country refers to an increase in the standard of living of its people coupled with a sustained growth rate. Today we are going to discuss in brief about the concepts of consumption, savings and investment and also line out the relationship between these three variables according to the classical system.

savings and investment

Consumption, Savings and Investment

Consumption

The main hypothesis of Keynes suggested that our disposable income which can be arrived at by deducing tax liabilities from gross income influences our level of real consumption. Further explanation on this is

C = f (Y) where C stands for consumption and Y stands for disposable income.

Keynes also held the view that people tend to enhance their consumption level along with a rise in their disposable income.

However, the increase in disposable income is greater than the increase in consumption. This hypothesis can be termed as our marginal propensity to consume and indicates a positive correlation between these two variables.

This, if our income increases by one unit, our marginal propensity to consume increases by 0.8 units. Hence the remaining 0.2 units are used for savings.

Y = C + S where Y stands for disposable income, C stands for consumption and S stands for savings.

It is also imperative to note here that propensity to consume and desire to consume are not similar in nature as the former means effective consumption.

Both objective and subjective factors influence our consumption function. Tax policy, interest rate, windfall profit or loss and holding of assets are some objective functions whereas subjective ones relate to motives of foresight, precaution, avarice, and improvement amongst individuals.

Browse more Topics under National Income

Learn more about National Income here in detail

Savings

In plain words, savings refer to the excess of disposable income over consumption expenditure.

From a national level, the unconsumed part of the entire nation’s income comprising of all its members can be termed as National Savings.

Total domestic savings, on the other hand, can be defined as the summation of savings of the government, the business sector, and households.

Some of the biggest determinants of savings are

  • Income, as saving income ratio holds a proportionate relation with the rise in income. People also have a tendency of saving the excess part of their income but not the entire bulk.
  • Distribution of income as the savings process is helped to a great extent by inequality of income distribution. Our desire to showcase a superior standard of living in comparison to our neighbors often steers us towards purchasing expensive goods which in turn declines the level of savings.
  • Psychological or subjective factors such as savings to safeguard ourselves from future insecurity and uncertainty. The ultimate attitude of people is driven towards savings by their farsightedness. This, in turn, boosts them up to enjoy a better standard of living both for themselves and their loved ones.
  • Prevalent financial instruments and rate of interest as a higher rate motivates greater savings.

Investment

Definition of Investment is:

  • Change in capital stocks or inventories pertaining to a business venture between two different periods or
  • Production of fresh capital goods such as plants and equipment.

Relation Between Savings and Investment In Classical System

According to this theory, Savings (S) gets equated with Investment (I) automatically which otherwise alters the interest rate. If savings exceeds investment, the excess supply of funds brings down the rate of interest.

This, in turn, reduces savings and increases investment for maintaining equilibrium.

However, this law of the market holds good when the entire amount of savings is invested.

Questions Consumption, Savings and Investment

  1. Savings is a form of _______.

Ans.     Investment

  1. Keynes hypothesis suggests that people tend to enhance their _____ along with an increase in their disposable income.

Ans.     Consumption level

Share with friends

Customize your course in 30 seconds

Which class are you in?
5th
6th
7th
8th
9th
10th
11th
12th
Get ready for all-new Live Classes!
Now learn Live with India's best teachers. Join courses with the best schedule and enjoy fun and interactive classes.
tutor
tutor
Ashhar Firdausi
IIT Roorkee
Biology
tutor
tutor
Dr. Nazma Shaik
VTU
Chemistry
tutor
tutor
Gaurav Tiwari
APJAKTU
Physics
Get Started

3
Leave a Reply

avatar
2 Comment threads
1 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
3 Comment authors
priyahXyzakshay Recent comment authors
  Subscribe  
newest oldest most voted
Notify of
akshay
Guest
akshay

why is personal income not taken into national income?

Xyz
Guest
Xyz

Bcz it is counted only one time and is counted in boss’s expense.
And according to boss it is expense and our’s income.
So personal income is not taken in national income

dssss
Guest
dssss

what is boss expence

Aayush jain
Guest
Aayush jain

salary

Mark
Guest
Mark

It’s is taking into national income, it just depend on the approach you’re using, if you’re using an income approach (reward of factors of production) in getting your GDP, then all income at personal (reward for labour= wages and salaries), firm(interest, profit, dividend and undistributed profit) and govt level (this will be gotten when you get you calculate for your NI= NNP-(indirect business tax+subsidies) will be added together.

zarak
Guest
zarak

we use personal income on our on

priyah
Guest
priyah

what are the purpose of measuring national income for a country ?

Stuck with a

Question Mark?

Have a doubt at 3 am? Our experts are available 24x7. Connect with a tutor instantly and get your concepts cleared in less than 3 steps.
toppr Code

chance to win a

study tour
to ISRO

Download the App

Watch lectures, practise questions and take tests on the go.

Get Question Papers of Last 10 Years

Which class are you in?
No thanks.