expenditures. Young couples, for example, save in order to accumulate
enough funds for a down payment on a house. Couples with young
children save to help finance their children’s university education.
Despite the many and varied reasons why any individual household
chooses to save a lot or a little, to understand the economy’s overall
supply of financial capital, economists focus on three key determinants of
household saving—current income, expected future income, and the
interest rate.
Saving and Current Income
Most people try to smooth their spending across time. Instead of spending
a lot when income is high and spending only a little when income is low,
most people prefer to spend a relatively stable amount from year to year.
The result is that in high-income years people tend to save a lot, and in
low-income years people tend to save only a little. (In years when income
is very low, people may save a negative amount, meaning that they spend
partially out of their accumulated assets or go into debt by borrowing to
finance their expenditures.) When economists examine statistics across
many households in the economy, they find that the positive relationship
between total income and total saving is relatively stable.
Household saving is positively related to current income. An increase in current income
increases the supply of financial capital.Saving and Expected Future Income