Question

​Who are net savers in an economy: households or firms? Why?

Answer 1

Net savers:

The deficit or surplus spending units consists of households, businesses or government entities. Generally households are considered to be net savers whereas business & government together form a group & remain as net borrowers. Businesses are considered to be deficit spending units because they make investments in projects for their growth opportunities which can’t be done through their internal funds alone but they have to rely on external borrowings like sale of stock or issue of debt to finance their projects.

Households on the other hand are considered to be savers because they earn more than they spend & they also indulge in lot of saving activities. Again we can’t say all households are net savers. It depends on the family. An young family tend to spend more whereas old people tend to spend less & save a lot. Likewise a newly started company may be a deficit spending unit as they borrow a lot to grow their business whereas large companies have surplus in the form of reserves. In spite of that, companies still borrow from external sources to fund for their seasonal needs like building their inventory etc.

Hence to conclude, whatever may be the business, they lie on the spending side & can’t be the savers of economy. Whereas households even if they spend, they don’t go to the extent of borrowing & spending & try to save a lot. Hence to some extent, they can be considered as savers of economy when compared to business people.