Saving function or propensity to save shows relationship between saving and income. It is a counter part of consumption function. We can drive the corresponding saving function from a particular consumption function. Saving depends upon the level of income. The higher the level of income, the higher will be the saving ratio. Generally, In the situation of optimism, people consume more and save less. On the other hand, in the situation of pessimism, people consume less and save more. The saving function can be expressed as:
S = Saving
Y = Income
F = Functional relationship
So, the saving function shows a functional relationship between S and Y, where S depends on Y and Y is independent variable. Let’s understand the saving function with the help of an imaginary table.
The above imaginary table shows the relationship between income and saving. When the level of income is zero, the level of saving is -20 billion which is indicating dis-saving. When income becomes Rs. 50 billion, the level of saving becomes zero. When income rises from Rs.50 Billion to Rs. 100 billion, the level of saving also rises from zero to Rs. 20 billion. We can see as much as the income rises the saving also rises. This is representing saving function or propensity to save. The propensity to save is calculated by subtracting the amount of consumption from the corresponding amount of income.
The saving function can also be illustrated with the help of a diagram.
In the above figure 2.7, the level of income on X-axis and the level of saving on Y-axis have been measured. SS is the saving curve which is showing propensity to save at different level of income. We can see when level of income is Rs. 50 billion, the level of consumption is also Rs. 50 billion while there is no saving at Point A. Before point A, there is dis-saving (consumption exceeds income). It can be seen as much as the level of income is increasing, the level of saving is also increasing as representing by the points B, C and D. This is showing positive relationship between income and saving. This relationship is known as propensity to save.
Relationship Between Income and Saving
2. Saving can be negative. When the saving is negative it means the consumption is more than income. For example, if income is Rs. 10 million and consumption expenditure is Rs. 12 million. Then saving will be negative as (10 - 12 = -2). This is indicating dis-saving. When both income and consumption expenditure become equal, saving becomes zero. The Saving is positive when consumption expenditure is below income.