Private Saving
What is Private Saving?
Private saving is the portion of disposable income that households and businesses do not spend on consumption.
It is calculated as disposable income minus consumption. Private saving is a key source of funds in the loanable funds market and contributes to national saving along with public saving. Higher private saving increases the supply of loanable funds and lowers real interest rates.
Private Saving: a worked example
Households in a small economy earn 900 billion dollars of income and pay 150 billion dollars in taxes, so disposable income is 900 - 150 = 750 billion dollars. They spend 640 billion dollars on consumption. Private saving is 750 - 640 = 110 billion dollars. Now bring in the government: it collects 150 billion in taxes and spends 170 billion, so public saving is 150 - 170 = -20 billion dollars, a deficit. National saving is 110 plus negative 20, which is 90 billion dollars, and that 90 billion is what the loanable funds market has available for investment. Notice that private saving stayed at 110 billion the whole time. Only the budget position of the government changed the national total.
The mistake students make with private saving
Calling a stock purchase 'investment'. In everyday speech buying shares is investing, but in the national accounts that purchase is saving, income not consumed and handed to a firm through a financial market. Investment means new physical capital: a factory, machinery, or a newly built home. Saving supplies the loanable funds market and investment demands the funds, so mixing the labels collapses the whole graph. The other slip is subtracting consumption from total income rather than disposable income, giving 900 - 640 = 260 billion instead of 110 billion and overstating saving by the entire 150 billion tax bill.
Private Saving questions
How do you calculate private saving?
Private saving equals disposable income minus consumption. Start with income earned, subtract taxes and add any transfer payments received to get disposable income, then subtract what households spend on goods and services. With 750 billion dollars of disposable income and 640 billion dollars of consumption, private saving is 110 billion dollars. Business retained earnings count as private saving too, since firms sit in the private sector alongside households.
What is the difference between private saving and national saving?
Private saving covers only households and firms, while national saving adds the budget position of the government. National saving equals private saving plus public saving, where public saving is tax revenue minus government spending. An economy can have healthy private saving of 110 billion dollars and still see national saving fall to 90 billion dollars if the government runs a 20 billion dollar deficit. National saving is the figure that determines how much is available to fund domestic investment.
How does private saving affect interest rates?
Higher private saving shifts the supply of loanable funds to the right, which lowers the equilibrium real interest rate and raises the quantity of funds borrowed. Cheaper borrowing encourages firms to fund more capital projects, so investment spending rises. The chain runs from saving decisions to the supply curve to the real rate to investment. A fall in private saving runs the same chain backwards, pushing the real interest rate up and squeezing investment.
Formula / Example
This is the live Loanable Funds sandbox. Drag the curves, or open the full version.
Related terms
Common comparisons
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