Question

1. a) Compare savings surplus and savings deficit units and indicate which economic units are of one type or the other.

              b) How and why do corporations save?

             c) Describe the principal factors that influence the level of savings by individuals

  

Answer 1

a]

Savings surplus units are entities whose income exceeds their expenditures over a defined time period. Savings deficit units are entities whose expenditures exceed their income over a defined time period. Individuals and households are usually savings surplus entities. Government bodies such as municipalities and states could be savings deficit entities if their expenditures exceed their income

b]

Corporations save by investing their excess income in interest earning investments such as high-quality investment grade bonds, money market instruments, and even equities. Corporations save to reinvest their profits into expanding the existing business, or to invest in new investment opportunities.

c]

Level of savings by individuals is influenced by :

• Overall income - High incomes enable high savings as there is more disposable income, whereas low incomes make savings difficult
• Inflation - High inflation could make individuals spend more now, than save it for the future since the purchasing power will decrease
• Interest rates - higher interest rates mean that individuals will save more
• Overall age of population - a younger population will save more whereas an ageing population will save less and spend more
• Individuals in consumption oriented economies tend to save less than individuals in investment oriented economies