What Is Your Role In The Circular Flow Of Finance Elementary Theory of Income Determination – Concept of Savings

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Elementary Theory of Income Determination – Concept of Savings

Saving can simply be defined as that part of income that is not spent. In other words, it refers to all or part of the income that is not spent immediately, but is reserved for future purposes. The money that is saved represents a withdrawal from the circular flow of income. It can only be returned to the circular flow of income through investments. The factors that determine personal savings are as follows:

1. Interest rate: A higher interest rate will encourage people to save

2. Political stability: People are more likely to save when there is political stability. But there is little or no saving in times of war or inter-tribal crises.

3. Size of income: As a person’s income increases, his ability to save also increases. In other words, the higher the income, the greater the tendency to save, while the lower the income, the lower the tendency to save.

4. Availability of financial institutions: People are more likely to save if financial institutions like savings banks and other financial institutions are available.

5. Sense of responsibility: People may choose to save for one or more of the main reasons based on their income. A person with a high income who decided to save has a high sense of responsibility, and a person who refuses to save has a weak sense of responsibility.

6. Government policy: The government can influence people’s attitude towards saving in several ways. Personal savings can be encouraged through interest rates and income tax relief.

reasons for saving

People may choose to save in order to accumulate capital that can be used to start a business. You can practice this to deal with unforeseen and unexpected circumstances such as housing problems, retirement, illness, layoff, etc. Of course, you continue to acquire assets and accumulate wealth. There are several reasons: to care for further purposes such as old age, children’s education and gaining social status. With this in mind, knowing the different types of savings is vital, and there are three such, namely: personal, corporate and state savings. Personal savings are those that an individual keeps with him for personal reasons. While corporate refers to the type of savings held by companies and other business organizations. They engage in this practice when profits are high, when taxes are low, or for other critical reasons. Government savings are a type of savings held by the country’s government. The government can save through a budget surplus in other ways. Savings covers all categories or levels of people from individuals to corporate societies/organizations/enterprises and even to the government. A healthy habit of saving is essential for the development of the national economy.

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