Concept of Consumption and Saving

THE CONCEPT OF CONSUMPTION AND SAVING. 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. 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 fiancee 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 factor is almost nil but in investments, the risk of losing money is always taken into serious consideration. Basically in order to start a savings account, all it takes is a visit to the bank. While in the case of investments, it can take form in many ways. Buying a shop lot in a town and letting it out for rent is also considered investing.

Buying shares in the stock market is also another form of investment. Savings can be considered as the cash that is kept in the bank or any other financial organization that provides the facility. This saving is done for a long time but the growth rate of the cash is very low. On the contrary, investment provides the growth opportunity to the cash. CONCEPT OF CONSUMPTION Ever since Adam Smith’s celebrated dictum that consumption is the sole end and purpose of production, the consumption concept has played a significant role in economic theory. Consumption is the total opposite of the term saving.

Consumption is basically the spending of cash in order to obtain or receive satisfaction. Consumption is a fairly common concept in economics, and it gives rise to derived concepts such as consumer debt. As a whole, consumption is presumed to be the opposite of production. This assumption is pretty obvious because of the fact that production means the process to manufacture while consumption will be at the end of the cycle. Still, the precise definition for the term consumption may vary because different groups of economists define production quite differently.

But, referring to the mainstream economists, only the final purchase of goods and services by individuals constitutes consumption, while other types of expenditure such as fixed investment or government spending (taxes and fines), are placed in a different category, apart from consumption. Meanwhile, there are also economist who defines consumption in a much broader scope. Whereby they say that consumption aggregates all economic activities that does not entail the design, production and marketing of goods and services. For example, the selection, adoption, use, disposal and recycling of goods and services.

Moreover, consumption can also be measured in a variety of different metrics such as energy and energy in economics. John Maynard Keynes developed a function, known as the consumption function. This function is a mathematical function which is used to calculate the total consumer spending in an economy. John Maynard Keynes’s theory merely expresses consumption as a function of the aggregate disposable income. Basically this metric essentially defines consumption as the part of income that is disposable and does not go into saving.

But disposable income in turn can be defined in a number of ways – for example, to include borrowed funds or expenditures from savings. Traditionally, consumption was seen as rather unimportant compared to production, and the political and economic issues surrounding it. With the development of a consumer society, increasing consumer power in the market place, the growth in marketing, advertising, sophisticated consumers, ethical consumption etc, it is recognised as central to modern life. People in different position in respect to income have systematically different structures of consumption.

The rich spend more for each chapter in absolute terms, but they spend a lower percentage in income for food and other basic needs. The percentage values of an aggregation over all the households in a country can thus be used for judging income distribution and the development level of the society. The rich have both higher levels of consumption and savings. In differentiated product markets, the rich can usually buy better goods than the poor. This happens also because they tend to use different decision making rules. In other words, consumption depends on social groups and their behaviours, as well as their proneness to advertising.

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