Consumption and Saving

Our first step will be to define saving. Saving can simply be defined as income minus consumption:

saving

Saving is income minus consumption. Algebraically, S=Y-C, where S is saving, Y is income, and C is consumption.

As usual, there are some technical points to put this definition in context.

• Although we are not yet taking taxes into account, we will have to do so eventually (and beginning in the next chapter, we will). With that in mind, for these purposes income is income net of taxes -- in the economist's jargon, "disposable income."
• Saving is not the same thing as "savings." When we use the term "savings" in ordinary conversation, we usually mean the total amount the person has available -- the person's net assets or the assets the person has available. However, in economics, "saving" means the addition to assets within a particular period. Notice, "savings" is plural -- which makes sense: the person's savings is the amount he or she has accumulated by saving over a long period of time.
• Technically, instead of defining saving in terms of income, we could define income in terms of saving. For many purposes, it makes sense to define income as consumption plus the increase in net assets. From that point of view, S=Y-C is not a definition but an identity.
• Because of that, people may save without thinking of it as saving. For example, suppose you have a mortgage on your house. A mortgage is a liability, and net assets are defined as gross assets minus liabilities, so the mortgage is a deduction from your net assets. Every month, you sent in a mortgage payment -- the interest for the month plus repayment of a small part of the mortgage. Since the repayment reduces your liability, it increases your net assets, and is saving -- even though you may not think of it as saving.

Now let's look at a graphical view of consumption and saving.

The Graphic View