15.4 The Supply of Capital

The supply of financial capital is determined by households’ saving
decisions. Saving is the difference between income and current spending.
At any given time, households have a stock of assets that represents the
accumulation of their past saving. During any given year, households
modify their accumulated stock of assets by either saving or borrowing.
(Saving leads to an increase in the accumulated stock of assets; borrowing
leads to a reduction in the accumulated stock of assets.) Thus, the annual
flow of saving by households leads to a change in the total stock of assets.

Households’ Supply of Saving

Households save because it allows them to spend in the future some of
the income they earned today. They do this for several reasons. First,
most people work for only part of their lives and, during their retirement,
must live off their accumulated assets (plus whatever income they receive
from employer or public pensions). Saving in the current year is a way of
building up this retirement “nest egg.” A second reason people save is
that the future is uncertain. Next year they might become unemployed
and thus lose their source of income, or they may have to provide for a
relative who has lost a job or become incapacitated. In any case,
uncertainty about the future provides a good reason to save. Finally,
many households save in anticipation of specific large future