FACTORS DETERMINANTS OF SAVING FUNCTION



Meaning: -The saving function is the counterpart of consumption function. Therefore, the factors determining savings are similar to that of consumption function. The factors can be divided into two groups.

Ø  Objective Factors Subjective Factors

I.            Objective factors: -

1.      Level of Income: - saving is the function of income. Normally, other thing remaining same, higher the income, higher would be the saving and vice versa.

2.      Income Distribution: -The pattern of saving is greatly influenced by the pattern of income distribution in the society. If the income is concentrated with few people, then the rate of savings in the society may go up.

3.      Degree of indebtedness: -The savings rate also depends upon the degree of indebtedness. Higher the degree of indebtedness, lower is the propensity to save. This is because; a part of current income goes into repayment of loan and interest payments.

4.      Price Level: -The rate of saving also depends upon the price level in the country. Higher the prices, the more would be the consumption expenditure, and therefore, lower would be the saving rate, and vice-versa.

5.      Rate of interest: -Saving is the function of interest. Higher the rate of interest more is the attraction to save. Therefore, a higher interest rate wold makes people to save more in bank deposits, bonds, etc.


II.            Subjective Factors: -

1.      Tendency to save: -The amount of savings depends upon the tendency to save. There are certain individuals with a high tendency to save, and therefore, their savings rate would be higher.
2.      Precaution Motive:-People may tend to save a part of their income in order to build up reserves against unforeseen situations. Therefore, those individuals who develop a precaution motive tend to save more.

3.      Foresight Motive: - People may tend t save a part of their income for future needs, such as higher education for the children, old age needs, and so on. Therefore, persons who develop foresight motive tend to save more.

4.      Avarice (greed) Motive: -This motive makes people to save more, even at the cost of consumption. People get personal satisfaction in saving more.For example, a miser may save more, even at the cost of consumption.

5.      Motive of Calculation: -People may save more with the intention of earning higher return on accumulated savings. Therefore, current consumption may reduce.


6.      Motive of Pride: - Some people develop a sense of pride by saving more. They boast (show off) of their savings to others. Therefore, they may reduce consumption, and save more.