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P29. Consumption, savings and investment, p. 404.


1.    Components (1991):

                 food 15%

                 durable goods (car) 22%

2.    Function - look at notes, at very low incomes dissaving and vice versa.

Autonomous consumption- being consumed irrespect of income.

3.    Propensities

1.     The average propensity to consume (APC) is the proportion of income devoted to consumption=C/Y.

2.     --------- " -------------         to save (APS) ------ " ------- to savings = S/Y. APC+APS=1

Highest figure in 1980- 0.142, 1990-0.085

3.     The marginal propensity to consume (MPC) is the proportion of any addition to income that is devoted to consumption. MPC=C/Y. Remains constant as I rises.

4.     ---------- " --------- to save (MPS) is ------- " -------- to savings =S/Y. MPC+MPS=1.

4.    Determinants:

1.     Income

2.     The permanent and life-cycle hypotheses

In the short-run people have permanent income levels and if income increases suddenly they don not spend more(Friedeman). In life-cycle hypotheses people are supposed to predict their lifetime earnings regarding their predicted income.

3.     The distribution of income. Lower income groups have higher MPC.

4.     Consumers' expectations of inflation, unemployment and income.

5.     Cost and availability of credit.

6.     Wealth and savings from previous time periods.

If national income increases-movement along the consumption function. If e.g. availability of credit changes we get a new curve.


It is a money not spent, a withdrawal.

Hoarding- money put under the mattress. Serious problem in developing countries.


1.     Deferred purchase

2.     Contractual obligations- very significant, contacts to be fulfilled

3.     Precautionary motives (for rainy days)

4.     Habits and customs

5.     Age- older people save

6.     Taxation policy

Savings ratio in personal sector:

In 1970 rose because:

a)    The volatility of incomes (uncertainty)

b)    Possible unemployment

c)    Inflation - had to save more to maintain same amounts of savings

In 1980ies fell because:

a)    The decline in inflation

b)    Younger population - saves less

c)    Privatisation - ownership of shares is not savings in macroeconomy

d)    Other sectors (e.g. govn and firms) balanced personal savings

Discretionary saving- people save a sum every month (pensions)

Contractual saving- people are not saving determined sum (building society accounts)

Other sectors of economy:

They can save as well, it's called financial surplus (deficit). Until lately the surplus in personal sector was balanced by deficit in other sectors. They all balance with net investment abroad.


Omission of new physical capital (machines etc.) Important determiner of national income. Investment to government bonds is  not valid in macroec. as only paper changes owner.

Types of investment:

1.     Stocks or inventories- most volatile, can be + ive or - ive.

2.     Fixed capital formation- all investment other than 1.

Most of the investment is to replace worn out things.

Savings = Investment. Gross savings = gross fixed capital formation + change in stocks-net investment abroad.

Determinants of investment:

I is (unlike S) made to earn money and based on expected profits.

Induced investment- caused by endogenous(within) factors (rise in income rises I).

Autonomous investment- caused by exogenous (outside) factors (inventions).

1.     Rate of interest:

Most investments involve borrowing money.

There is also relationship between the amount of stock and the investment (MEC curve).

2.     Marginal efficiency of investment (MEI curve).

Concerned with flow of investment and shows how much is invested at every interest rate.

3.     Business expetations.

Yield of investment cannot be predicted accurately, thus expetations are important.

4.     The level of income.

A high level of national income stimulates investment.

If income is high businesses have large profits to plough back. Assumes that self-finance is more important than borrowing. This has not applied recently.

5.     The government investment.

They are usually not aiming for profits. Public and private investment tend to counterbalance each other.

6.     Induced investment: accelerator.

The accelerator hypothesis predicts that it is the rate of change of income rather than its level that determines investment.

Acceleration works: if income rises new capital is needed. As the investment is not 100% of the value of capital to replace it normally (is e.g.50%), then if demand would rise 100%, 100% of new capital (thus investment) is needed, investment now 150% from 100% rise in income.

Factors modifying the accelerator:

1.     Generally fluctuations are much smaller than predicted from theory and it's very difficult to demonstrate any mathematical formulae between Agr. Dem. and accelerator.

2.     Businesses learn from experience

3.     Capital output ratios are not constant

4.     Depreciation does not depend solely on time

5.     There are other investments besides "new investment" present (I to new technology).

6.     Time lags between the rise in demand and the building of factories

7.     Economy is usually not producing at maximum capacity

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