Saving is income
which is not spent. So as income raises both the total amount saved and
the proportion saved tend to increase. In the circular flow of
income, investment is injection and saving is leakage.
The following are the influences on savings.
1) The most important requirement of saving depends on
the level of income. One
can save only if the income is sufficient and more than enough to cover
the necessities of life. When income
increases the proportion of income saved tends to rise.
2) The prevailing
social attitude has a significant influence on the level of
savings. (Hardworking and careful saving were regarded as excellent
personal good quality).
3) The availability
of financial framework such as saving deposit facilities of banks,
insurance companies etc. These financial institution should provide sufficient
security that the savers must feel that their money is safe. They
should provide a facility to withdraw whenever saver needs money. They should
provide the service at the savers convenience.
4) The level of saving is also influenced by the rate of interest offered. The financial
institutions should provide the savers an opportunity to earn an income in
the form of interest.
5) The rate of
inflation tends to reduce the real value of money wealth. People tend to
save more at inflation in order to maintain the real value of their savings.
6) Many people consider that saving is a good moral habit. Some consider
the people ought to save, while other has a feeling of security [these types of savings are not affected by
rate of interest].
7) Large part of total saving is contractual in nature. People save through
insurance premium, pension funds and building societies as per a
contractual agreement to pay a fixed sum of money.
8) Many people save in order to achieve some definite objective.
Many people save in order to accumulate a fixed and known sum of money so
as buy something costly such as a motor bike, car or a holiday abroad
and so on.
9) Large part
of total saving is carried out by companies. Companies retain their
profit in order build up reserves which safeguard against future business
fluctuation or expansion.
10) A part of
total saving is made up of government saving. When government
revenue from taxation exceeds government expenditure, we have a form of public
saving.
11) Government
policies encourage saving such as favourable treatment like income tax
exemption.
Investment is mainly
concerned with net investment, which is the net addition to the total
existing stock of capital. There are two ways for increasing stock of capital When labour
force is increasing, an equal proportion of invest is likely to be made,
otherwise the amount of capital per worker would be falling. This process
is known as capital widening.
[It need not necessarily lead to any increase in output per worker]
When investment is increasing, an equal proportion of labour force is
likely to be made, otherwise the amount of worker per capital would be
falling. This process is known as capital
deepening.[it leads to an increase in output per worker]
The following are the influences on investment.
1) Rate of
interest influence investment. An increase in the rate of interest will
tend to reduce investment and vice versa.
2) Changes
in technology may need new machines which lower the cost of
production, therefore more investment is required.
3) Changes in
the cost of capital will also influence investment. If cost of capital
is less investment will be more.
4) Expectation
of entrepreneurs also influences investment. If they are optimistic the
investment is more.
5) Lower
corporation tax will likely increase post tax returns, so it will
stimulate investment.
6) An increase
in government incentives in the form of grants and investment tax
allowances will likely to increase investment.
7) Higher
profit levels will encourage firms to invest more.
8) The rate of
change of income is also another influence on investment.
Distribution of Income
Income is a flow of money over a period of time whereas wealth is the stock of money at a
point in time or an asset which has money value. Income can be measured
over a period of time (daily, weekly, monthly etc.) whereas wealth can be
measured at a point in time. Different income groups are likely to have
different patterns of expenditure; a person with a lower income is likely
to spend, save and borrow less or more than someone with a higher income.
Income comes from two different sources. 1) Human wealth produces earned income – skilled [trained and
educated] and 2) unskilled workers earn an income for the mental or
physical ability possessed by them.
In
most of the societies, the income is unequally distributed, and the reasons for the unequal distribution of
incomes are as follows. 1) Differences in salaries, 2)
self-employment, 3) family status, and 4) other reasons – Old age,
unemployment and full time study.
Non-human
wealth produces unearned income
– such as income from non-human wealth such as rent received from house or
other property, interest from deposits and profits from shares – without
going to work.
Disparity
in earning arises from the difference in human wealth and non-human
wealth. The reason for disparity of
human wealth is due to the difference in opportunity to get education
and training, and employment opportunities.
The
reasons for the differences in
non-human wealth is because of 1) inheritance – legacy or wealth
received from their parents as of right. 2) Interest on savings.
3) Self-made wealth – a) invention or development of new products b)
Ability to forecast the future consumer requirement c) Discovery of
natural resources or its ownership. d) Luck.
There
are two import noticeable trends of
distribution of wealth. They are
1)
In the recent years more and more
women own property and have high paying jobs which in turn increasing
their holding wealth.
2)
Home ownership has grown rapidly
in recent years. The price of average house rise, so does the wealth of the
house owners.
The
redistribution of income is possible by provisions of government intervention such as provision of public goods (e.g.
public transport), merit goods (e.g. education, health facilities)
and transfer earning (unemployment benefits). The purpose of
these benefits is to raise the income of the poor so that they can enjoy a reasonable standard of living.
These benefits are paid for by taxing, the people earn
more, the more tax.
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