Explain the relationship between Savings and Wealth, usually the concepts of flo

Question

Explain the relationship between Savings and Wealth, usually the concepts of flows and stocks. Is Saving the only means by which wealth can increase? Explain.

Give the 3 motivations for saving. Illustrate each with an example. What other factors would psychologists cite as being possibly important for saving?

Household saving rates in the United States are very low. Is this fact a problem for the US economy? Why or why not?

Why do increases in real interest rates reduce the quantity of savings demanded? (Hint ~ Who are the demander of savings?)

Name one factor each that could increase the demand for saving. Show the effects of each on saving, investment, and the real interest rate

Explanation / Answer

Relationship:

Saving is the excess income over expenditure. Usually such amount on regular basis used to be kept in a bank for earning interest. Savings could be done on daily basis, weekly basis, monthly basis, etc. It shows a regular flow of savings, indicating the flow concept.

Wealth is the excess amount of net asset over total liabilities. It is calculated on a particular point of time and it includes land and building, plant and machinery, Inventory, bank balance, etc. Therefore, it has the stock concept.

Saving is a part of wealth. Total amount of saving could be reflected as bank balance. Increasing saving certainly increases wealth. But this is not the only way of wealth increasing, since there are other components of wealth like plant, inventory, etc.

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