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Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment Notes

Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment Notes

Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment : We provides here Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment  in PDF Format and here we gave direct download links for Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment   pdf format. Download  Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment here and read well.

Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment Notes

Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment : Economics demonstrates, for example, that it is more efficient for individuals or companies to specialize in specific types of labor and then trade for their other needs or wants, rather than trying to produce everything they need or want on their own. It also demonstrates trade is most efficient when coordinated through a medium of exchange, or money.

Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment Notes

Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment : Consumption and savings are opposite by nature. The term consumption denotes expenditure and by savings we understand the act of preserving money for the future needs. Most of us are in the habit of meeting the present needs from our income. After that, if there remains anything, then only savings can be done. But in the long run, it is the savings that matters most.

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CONCEPT OF SAVING

The concept of saving is important in the context of economics and finance. In general application, saving usually stands for depositing money separately for a particular purpose, for instance investment in retirement plan or depositing cash in the bank. In other words, savings means the reducing of expenditure and the act to avoid wastage. According to personal finance concept, saving means keeping or conserving money to be used in the future. Whereby usually the money is deposited, instead of investing it, where a risk factor is always involved. Saving is done with some pre-determined investment objectives. In other words, saving is the act of conserving cash for any purpose or for future usage. On the other hand, savings means the cash saved to that very moment. Examples of saving are: 1) Mr. Lim has been saving 20% of his earnings just because he is aiming to increase his savings so that it would be enough to purchase a car. 2) Miss Camille has been saving 35% of her earnings just because she wants to get her fiancée a nice wallet for his birthday. Examples of savings are:

1) Mr. Jamal saved RM2100 to buy new clothes for his newly born son. 2) Patrick has RM 50,000 in his savings account.

Of late, the terms saving and investment has been have been contradicting. Although both saving and investment are means of achieving financial security for the present as well as the future, they are not actually the same thing. The big difference between savings and investment is the present of the risk factor. In savings, the risk.

Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment Notes

Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment :We showed previously how Crusoe could divide his GDP between consumption and investment by dividing his time between the production of goods he would consume immediately and goods that would yield future benefits.  In a modern society, the division is more complicated.  We now turn to the subject of what determines the division of GDP between consumption and investment.  We will also go beyond Crusoe and include government borrowing and international trade in our discussion.

One thing that makes our task simple is that the resources for investment come from saving.  Therefore, rather than talk about how people decide how much to consume, we will talk about how people determine how much to save.  Since income after taxes goes for either consumption or saving, it is a matter of twiddle dee or twiddle dum.

Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment-Saving and Investment as Different Concepts

Many people confuse the concepts of saving and investment.  The differences are important, so we will spend some time on the issue.

Saving takes place when people abstain from consumption, that is, when they consume less than their income.  Investment takes place when we purchase new capital equipment or other assets that make for future productivity.  Investment does not mean buying stocks or bonds.  Here are some important facts:

For Robinson Cruse, the difference between saving and investment is a distinction without a difference.  Since he does all saving and all investment, they are automatically equal.  However, for the larger economy, this is not true.  Investment funds come either from our own saving or from someone else’s saving.

The motive for saving is one of deferring your consumption to a later day.  We save when we consume only part of our income now and save for retirement, a rainy day, putting children through college, the summer home, etc.

The motive for investment is to make money.  Investment takes place when we purchase plants or equipment, which make workers and businesses more productive in the future.

Ultimately saving and investment must be equal, (subject to a couple of complications that make for nice exam questions).  As you will see in a moment, you can think of saving as a supply of funds for investment and investment as a demand for funds.  We will later draw supply and demand curves and show how saving and investment are equated.


Some Examples of Saving and Investment

The Facts

Saving or Investment?

The owner of Miller’s Pizzeria has after tax income of $50,000 this year.  He spends $40,000 on consumption, and decides to save the rest by investing in a $10,000 certificate of deposit at the 87thNational Bank.  This brings his accumulated deposits to $50,000.$ 10,000 in saving.  The word “invest” is misused.  The rest of the deposits constitute savings, or cumulative saving.
The owner decides to purchase a new $10,000 pizza oven, paying for it by taking $10,000 out of the savings account at the 87th National Bank.Investment.
In the next year, the owner decides to purchase a new, high tech oven for $25,000, paying for it by leaving $5,000 in earnings in the business and taking an additional $20,000 loan from the Bank.Both.  The new oven is an investment of $25,000, and he saved $5,000 this year by not taking part of the money out of the business for spending.

Warning required by the Economist-General:

·        Points are deducted on all exams for confusing saving and investment.

Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment-Investment

Some Preliminaries on Interest Rates

An understanding of interest rates is important for understanding saving and investment.  Put simply, an interest rate is the price of a loan, expressed as a percentage of the amount loaned each year.  Thus, if the interest rate is 6%, and you borrow  $100, you must pay back $106 at the end of the year.  Moreover, when you deposit $10,000 in a certificate of deposit you are effectively making a loan to the bank or other financial institution.  The interest rate is the price the bank pays you.  In short, interest is either the reward you get for saving or the premium you pay for having funds now rather than later.  As we shall see, the concept of interest is a crucial economics concept.

Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment-Why do People Invest?

People invest to make money.  They figure that they can earn a higher return on their investment than it costs them to borrow the funds. If they are investing their own funds, then they invest because they figure they can earn more than on any alternative means of holding their savings, such as CD’s or in the stock market.

Some simple examples will make the point.  Suppose you have five different one period investment opportunities.  Each project requires $30,000. You can invest in any or all of the projects. However, if you borrow, you must repay $30,000, plus the interest rate, (1+r) for each project.  Each project has a different projected value next period, as listed in Table 5-2.

Motives for Saving

People save so that they can consume more in the future.  A decision to spend now or save is really a choice of when to spend – now or in the future.  The decision depends on wealth, disposable income, real interest rates and tastes or preferences for spending now versus waiting.  While we will not engage in a complete discussion of the determinants of saving, the following examples will make some of the points.

Fred and Barney have the same income this year.  They are alike in all respect except that Fred gets a big inheritance from his beloved Aunt Matilida this year.  Who is likely to save more from this year’s income, Fred or Barney?  Answer: Fred has more assets that Barney, and can live better.  He is likely to spread his largess over several years, meaning that Fred will spend more this year than Barney.  In turn, this means less saving this year.

Fred and Barney have the same income this year.  They are alike in all respect except that Barney has a generous pension plan.  Fred has none.  Who is likely to save more from this year’s income, Fred or Barney?  Answer:  a true measure of assets includes funds in things like pension plans, not just in stocks, bonds and bank accounts.  The logic given above applies here, so that Barney is likely to spend more this year than Fred.  In turn, this means that Barney will save less this year.

Fred and Barney have the same income this year.  They are alike in all respect except that Barney has just made a killing in the stock market.  Fred kept his money in Certificates of Deposit.  Who is likely to save more from this year’s income, Fred or Barney?  Answer:  look at the two questions above.  Barney will save less this year.

Fred and Barney have the same income this year.  They are alike in all respect except that Fred expects a big pay raise next year.  Who is likely to save more from this year’s income, Fred or Barney?  Answer:  just as people base their consumption on assets and income, so too do people base their consumption on current and future income.  This means Fred will spend more and save less this year.  Fred has twice Barney’s income this year.  Who is likely to save more from this year’s income, Fred or Barney?  Answer:  we just don’t have enough information to tell.

Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment Notes

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