Day 229 Savings and wealth

Savings and wealth

Saving and wealth are two essential measures of macroeconomic performance. They are separate factors yet hold mutual impact. 

Wealth is the value of assets minus total liabilities, and saving is the disposable income less current spending. Wealth is the stock figure which represents a value at a point of time, and saving is the flow represents the rate of change in wealth. In some extent, wealth will affect consumer’s saving pattern, on the other hand, change in wealth equals to saving plus net capital gain. The main motivation of savings are: life-cycle, precautionary and bequest saving. However, other outside factors like real interest rate, self-control and demonstration effects also have a substantial impact over saving behavior. The national saving level is the key determinant for the economy’s future growth, it is considered with two sectors, private and public saving. The private sector is the combined savings of households plus business. It equals to the after-tax income minus consumption expenditures. The public saving is the amount remains after the government covers its spending by the net tax collected(tax-transfer payments to the public). A negative public saving can be interpreted to government budget deficit, and a positive public saving means the government is experiencing the budget surplus. Even though some countries like Australia may have a low household saving level, it may not cause a problem due to the business saving, and public saving is large enough to cover it. As stated before, the saving defines the national ability to supply funds that used for investment on new capital goods. This relationship is directed by the real interest rate. It is straight-forward, since the high interest rate will increase the supply of saving and decrease the firm’s willingness to borrow for investment, vice versa. Moreover, the requirement of new technology will stimulate the demand of investment, therefore, raise the real interest rate. 

However, economist need to be aware of government budget deficit .It dramatically reduces the national saving supply, hence push the real interest rate as well. This is the crowding out effect that harms the economy’s propensity to invest on new capital goods, which will benefit the economy in the future.