December 6, 2021

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Saving Investment Equals Investment Equity

Saving and investment equality are not equal; they cannot be. Saving can be defined as an attempt to get more money or a proportion of income or wealth from future earnings for the benefit of present or future generations. Investment on the other hand, is using current assets to achieve future financial goals and should be considered in the same light.

Saving and investment equality are determined by two methods; the first by actual income or wealth accumulated, and the second by the difference between actual and future incomes or wealth. In the saving schedule analysis, both saving and investment are cumulatively assessed. The differences between saving and investment are then compared to the national income and other variables. A saving schedule is a financial plan that provides for adequate levels of saving for the future. The planning process is guided by both macroeconomic policies and personal saving preferences.

This saving and investment equality are a theoretical equilibrium, which is not achieved in the real world because there are many factors that can change the saving and investment behavior of individuals. Thus, one may choose to invest more today, earn a bigger return, or save some additional, lump sum cash to invest later. All these decisions are based on their individual preferences. However, the saving and investment equilibrium is a set-up where saving and investment equalize. It can only be achieved if and when the preferences of consumers are consistently realized through investment and saving.

The saving-investment equality is also a key concept in macroeconomics. In this theory, saving and investment are interdependent and can thus be expected to move towards a point of equilibrium. Once these equilibrium points are attained, then the macro-economic policy can be considered to have been balanced. However, in reality, saving rates of households tend to vary widely from that of businesses and the saving-investment equality is therefore also incomplete in the real world.

Saving is an important part of the overall consumption and saving always equates to investment. Most mainstream economic approaches to economics, including the mainstream PPP approach used by Canadian provinces, do not consider saving equal to investment. Instead, they attempt to measure saving and investment indirectly through the means of interest rates and debt-to-income ratios. The purpose of this approach is to measure saving primarily as a fraction of income rather than directly as an investment.

Fortunately, saving and investment do not necessarily mean the same thing. One way to illustrate this is by contrasting current consumption with potential income. The goal of a modern household is to meet its existing needs while increasing its potential income. In this approach, saving equals investment because households attempt to replace their current consumption needs with higher-valued assets (such as land and real estate). The difference between saving and investment lies in the duration of time needed for income to realize as opposed to the current consumption value of the household’s goods and services. Thus, the saving/investment gap (the difference between expected returns and actual returns) between these two measures is called the equity gap.

By itself, saving is defined as the value of future consumption goods less the cost of current consumption goods. This means that saving represents the difference between national income (the amount of money spent in consumption goods) and potential income (the amount of money expected to be generated from an investment). By contrast, investment is defined as the increase in national income that is achieved by raising capital stock, creating new economic wealth, or finding new uses for existing non-fixed assets.

In practice, saving and investment equality are not identical. For instance, saving represents the difference between potential income (the amount of money expected to be generated from an investment) and actual income (the amount of money actually spent in consumption goods). Real estate, while a major category of saving represents a much smaller portion of saving and investment equality. As a result, saving and investment equality are conceptually different from one another and cannot be equated. The concepts of saving and investment equality can, however, be used to calculate a savings ratio that is a key determinant of the efficiency of an economy. Calculating this savings ratio is, in turn, a key determinant of macroeconomic performance.