Optimization of macroeconomic proportions is achieved through the mechanism of supply and demand. Consider the problem of matching supply and demand in relation to the owners of capital and labor.
Firms, whose administration acts as representatives of capital, produce products, earn money for it and demand labor. Workers offer their labor force, receive remuneration for this and demand the products produced. On the basis of the interaction of firms and households in the market for goods and services, the proportion of the division of GNP into consumption and savings is formed.
Aggregate consumption is the individual and joint use of consumer goods aimed at satisfying the material and spiritual needs of people. In value form, this is the amount of money that is spent by the population on the purchase of material goods and services. Thus, everything that does not relate to savings, does not go in the form of a tax, is not in foreign accounts— this is consumption. People tend to put off consumption today in the hope that consumption in the future will bring them more utility than in the present. The primary unit of consumption is the family. It forms the volume and structure of consumption. A family farm is characterized by a common consumer budget, housing and accumulated property.
Consumption of the population is one of the main components determining the development of the economy. Consumer spending accounts for 2/3 to 3/4 of gross domestic product. They form consumer behavior, which is a kind of indicator of the cyclical development of the economy.
Aggregate saving is deferred consumption or that part of income that is not currently consumed. It is equal to the difference between income and current consumption. Saving is a process that is associated with the provision of production and consumer needs in the future. Consequently, saving is an economic process associated with investing: the part of the income that remains unused at the cost of current production and consumer needs is accumulated. Savings are made by both firms and households. Firms save for investment – to expand production and increase profits. Households save for a number of reasons, including: the motives of ensuring old age and transferring wealth to children, saving up funds for the purchase of land, real estate and expensive durable goods. Savings and investments are carried out independently of each other, by different economic entities and for different reasons. In addition, there are more:
State savings are a positive difference between revenues and expenditures of the state budget or a positive budget balance; National savings are the part of national income after deducting its consumed part or the total amount of private and public savings.
How is income allocated to consumption and savings? Answering this question, it is important first of all to characterize the general properties of the consumption function. It shows the ratio of consumer spending to income in their movement.
Personal consumption of households C forms an essential part of effective demand. But if we recall that saving S is an excess of income over consumer spending, it becomes clear that, analyzing the factors that determine consumption, we simultaneously consider the factors on which saving depends:
Y = C + S.
This equation shows that part of the income (Y) goes to personal consumption C, and the surplus takes the form of savings S. At the same time, the expenditure of society can be represented, on the one hand, as the demand for consumer needs C, and on the other hand, as investment I:
Y = C + I.
Characterizing the relationship between the volume of national income and consumption expenditures, D. Keynes noted that the level of consumption depends on the level of income. “The psychology of society is such,” Keynes wrote, “that with the growth of total real income, aggregate consumption also increases, but not to the same extent as income grows” (Keynes J. General Theory of Employment, Interest, and Money. Moscow: Progress, 1978. p. 80). In a formalized form, consumption can be expressed by the following function:
C = C (Y).
However, income is the main factor determining not only consumption, but also savings:
S = S (Y).
Research has found that consumption and conservation move in the same direction as income. Changes in consumption and savings as income increases are characterized by the concepts of “average propensity to consume and save” and “marginal propensity to consume and save”.
The average propensity to consume (APC) shows the ratio of consumption to income:
The average propensity to save (APS) characterizes the ratio of savings to income:
However, income is not constant, it changes, so consumption depends not only on income, but also on the so-called marginal propensity for consumption (MRS).
The marginal propensity to consume expresses the ratio of any change in consumption to the change in income that caused it. Mathematically, it looks like this:
This model shows us how much of the additional income goes to the increment of consumption. How to determine the MRS? To do this, consider the data of table. 8.1.
Consumption and savings in conventional monetary units (c.d.u.)
Annual income per family member before taxes, c.d.u. (Y)
Consumption expenditure, c.d.u. (C)
Savings, c.d.u. (S)
The first column contains groups of families depending on the level of per capita annual income. With the transition from group B to group B, income increased by 300 dens. units, i.e. from 900 to 1200 den. At the same time, consumption grew by only 240 dens. units, from 900 to 1,140 den. Thus, the share of consumption in the income increment can be calculated as follows: 240 : 300 = 0.8, i.e. when moving from group B to group C from each additional day. 80% of the income goes to consumption and 20% to savings, the marginal propensity to consume in this segment is 0.8. Similarly, the MRS is calculated in the transition from any income level to the next.
Both consumption and savings are absolutely growing, but the relative share of consumption is decreasing more and more, and the share of savings is growing. So, according to the “basic psychological law”, the magnitude of the marginal propensity to consume is between zero and one:
This leads to the conclusions:
if the MRS = 0, then all the increase in income will be saved, since saving is the part of income that is not consumed; if THE MRS = 1/2, this means that the increase in income will be divided equally between consumption and saving; if the MRS = 1, then all the increase in income will be spent on consumption.
Consumption and saving are like two mirrors, i.e. in a similar way we can consider the marginal propensity to save (MPS). The marginal propensity to save is the ratio of any change in savings to the change in income that caused it:
With the transition from group B to group B, income increased by 300 dens. units, and the amount of savings is only 60 dens. Therefore, the marginal propensity to save will be 0.2 (60 : 300 = 0.2).
It is easy to see that if C + S = Y (i.e. total income is broken down into consumption and savings), then ΔC + ΔS = ΔY . Then the sum of the marginal propensity to consume and the marginal propensity to save is 1:
MRS + MPS = 1
Therefore, MRS = 1 – MPS and MPS = 1 – MPC.
Having defined the function of consumption and savings, we can now argue that the central factor affecting their levels is income. As a rule, as income grows, both consumption and savings of the population grow. At the same time, in the conditions of stable economic growth, the MRS tends to decrease, and the MPS – to growth. In the conditions of inflation, a different process is observed, namely, the MRS acquires a tendency to increase, and mps – to decrease. With the instability of the economic situation, the lack of protection of deposits from inflation, the population begins to increase consumption, especially of durable goods. A peculiar type of savings in such conditions is the acquisition by the population of such goods as jewelry, furs, cars, cottages, etc.
In addition to these factors, consumption and savings can be affected by:
tax increases that reduce consumption and savings; price increases (cause different reactions in consumption and savings among groups with different incomes); an increase in social insurance contributions (may cause a reduction in savings); rush demand (can contribute to a sharp increase in consumption); growth of supply in the market (contributes to the reduction of savings); income growth (affects the growth of consumption and savings).
The macroeconomic approach involves the construction of the function of consumption and savings at the level of society. Using the initial data of the table, let’s turn to a graphical analysis of the propensity to consume. The consumption function is presented in Fig. 8.8. How is this chart constructed? Disposable income is deposited on the abscissa axis. On the axis of the ordinate is the cost of consumption. If consumption expenditure corresponded exactly to income, then this would reflect any point lying on a straight line drawn at an angle of 45°.
But in reality, such a coincidence does not occur and only part of the income is spent on consumption. Therefore, the consumption curve deviates from the 45° line downwards. The intersection of the 45° line and the consumption curve at point B indicates a level of zero savings. To the left of this point, negative savings can be observed. In this case, expenses exceed income. And on the right is a positive saving.
The amount of consumption is determined by the distance from the abscissa axis to the consumption curve, and the amount of savings is determined by the distance from the consumption curve to the 45° line. For example, with an income of 2400 den. The situation is as follows: the D1D segment shows the size of consumption, and the DD2 segment shows the amount of savings.
Similarly, the saving function, which is derived from the consumption function, is considered. The savings function shows the ratio of savings to income in their movement (Fig. 8.8). Since savings are the part of income that is not consumed, the savings schedule complements the consumption schedule. This is due to the fact that savings and consumption in the amount of income in total give the amount of income.
How is the savings schedule built? To do this, you need to do a number of simple operations: first, imagine the abscissa axis in Fig. 8.9. as a 45° line from Fig. 8.8.; Secondly, it is possible on the line of 45° from Fig. 8.8. arrange the mirror – the graph reflected there will be an image of the savings in Fig. 8.9. Point B is the level of income when the savings are zero. Below it is negative saving, above it is positive saving.
The marginal propensity to consume MSAs, as noted above, reflects the amount of additional consumption caused by additional income. On the graph, this is expressed in the slope of the consumption curve: a steep slope means a high MRS, and a smooth slope means a low MRS. MRS is nothing more than an expression of the steepness of the slope of the line of consumption. Returning to the consumption graph, it can be concluded that the greater the propensity to consume, the more the consumption line will approach the 45° line and, accordingly, vice versa, the lower the propensity to consume, the further the consumption line from the 45° line.