Consumption, saving and changing ratios
| English | 中文 | Pinyin |
|---|---|---|
| savings ratio | 储蓄率 | chǔ xù lǜ |
| wealth effect/welθ ɪˈfekt/ | 财富效应 | cái fù xiào yìng |
A decision you can investigate
- Households can respond to uncertainty by saving more, even with unchanged current income. An increase in wealth can affect spending without being the same as an increase in monthly income.
- Trace which determinant changes.
Build the explanation
- Consumption depends on disposable income, interest rates, consumer confidence, welfare payments, wealth and access to credit. Disposable income is available after relevant taxes and transfers; saving is the part not consumed in the stated simplified household account. A savings ratio 储蓄率 is saving divided by disposable income, usually expressed as a percentage.
- A ratio over the whole income amount is an average, unlike a marginal propensity calculated from changes. Higher interest rates can discourage borrowing and reward saving, but they also change income for savers and borrowers. Welfare changes affect recipients’ disposable income; a wealth effect 财富效应 can influence spending independently of current income. Credit availability and confidence condition every channel.
Work through the evidence
- A fictional household has disposable income 1000, consumption 800 and saving 200. Saving ratio=200/1000×100=20%. In a later comparable period, disposable income 1100 and consumption 875 give saving 225; ratio=225/1100×100≈20.45%.
- The marginal propensity to consume over this change is ΔC/ΔYd=(875−800)/(1100−1000)=0.75. The marginal propensity to save is 0.25, not the later average ratio 0.2045. Separately, if concern about future employment lowers consumption to 750 at the original income 1000, saving becomes 250 and the ratio 25%; at unchanged prices this weakens the C component of AD. It does not prove every household responds identically.
What is original saving?
Disposable income 1000 minus consumption 800 equals 200.
Test the limits
- A higher savings ratio may reflect uncertainty, retirement planning, interest, reduced credit access or income distribution. More saving can finance investment, but investment needs willing borrowers and expected demand. A sudden fall in spending can weaken activity and income, so intended additional saving need not become the same additional realized saving across the economy.
- Distinguish a household’s stock of wealth from its income flow. Consider debt service and who gains from an interest-rate change. An average ratio alone does not identify the cause or the multiplier’s marginal parameters.
What is the marginal propensity to consume over the stated change?
Extra consumption 75 divided by extra disposable income 100 equals 0.75.
An average savings ratio can always be substituted for the marginal propensity to save.
They use different numerators and denominators and need not have the same value.
Apply and explain your answer
- Why is the later 20.45% savings ratio different from the 25% marginal propensity to save?
- The ratio divides all 225 saving by all 1100 income; the marginal measure divides extra 25 saving by extra 100 income.
Which can change C without a change in current disposable income?
Confidence, wealth and credit are distinct determinants.
Use the terms precisely
- savings ratio: Saving as a share of disposable income over the stated period.
- wealth effect: A change in spending associated with a change in the value of household assets, other relevant factors held constant.
Match the terms to their meanings.
Use each term for its stated economic relationship.
A fictional household has disposable income 1000, consumption 800 and saving 200. Saving ratio=200/1000×100=20%. In a later comparable period, disposable income 1100 and consumption 875 give saving 225; ratio=225/1100×100≈20.45%. The marginal propensity to consume over this change is ΔC/ΔYd=(875−800)/(1100−1000)=0.75. The marginal propensity to save is 0.25, not the later average ratio 0.2045. Separately, if concern about future employment lowers consumption to 750 at the original income 1000, saving becomes 250 and the ratio 25%; at unchanged prices this weakens the C component of AD. It does not prove every household responds identically.
A higher savings ratio may reflect uncertainty, retirement planning, interest, reduced credit access or income distribution. More saving can finance investment, but investment needs willing borrowers and expected demand. A sudden fall in spending can weaken activity and income, so intended additional saving need not become the same additional realized saving across the economy. Distinguish a household’s stock of wealth from its income flow. Consider debt service and who gains from an interest-rate change. An average ratio alone does not identify the cause or the multiplier’s marginal parameters.
Consumption depends on disposable income, interest rates, consumer confidence, welfare payments, wealth and access to credit. Disposable income is available after relevant taxes and transfers; saving is the part not consumed in the stated simplified household account. A savings ratio is saving divided by disposable income, usually expressed as a percentage.