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Essay On Household Saving

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National saving includes public and private saving. Household saving typically constitutes a major part of private saving compared to private corporations (Gersovitz, 1988; Rehman, Bashir, & Faridi, 2011). Saving is an important way to improve the well-being of household. It allows households to smooth consumption in case of high income volatility and increase the opportunity to invest in physical and human capital (Ashraf et al., 2003). For households, the tradeoff between current and future consumption results in saving (Sturm, 1983). There are numerous motives leading to the decision of saving. For instance, saving for retirement aims at financing future consumption when income decreases or becomes zero (life-cycle). Also, households save…show more content…
Friedman based his work on the intuition that income is more volatile than consumption. Consumption is based on long-term expectations about income since households prefer to smooth consumption over time and avoid short-term fluctuations (Meghir, 2004). The implication of this theory on household behavior is that household will save today if their income is higher than the future and vice versa. For example, in economic crises current income becomes lower than future income so people dissave to cover current consumption (Berry, Williams, & Waldron,…show more content…
The model assumed that there are three markets (labor, output and capital) and two living generations who are overlapping. Each person lives for two periods of time. The person works during the first period so the time is divided between leisure and work. During the second period, the person retires then dies by the end of period. Since there are no transfers or bequests, the wage, earned at the first period, is divided between consumption and saving. In the second period, the consumption of the person is financed by savings plus interest rate (Romer,
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