Q.N. 1 Saving and investment establish relationship between them and narrate with live

examples?

Generally, Savings is income not spent, or deferred consumption.

In Economics, Savings are defined as Income minus consumption.

According to Keynesian economics, “the amount left over when the cost of a person's

consumer expenditure is subtracted from the amount of disposable income that he or she

earns in a given period of time.”

Generally, investment is the application of money for earning more money. Investment

also means savings or savings made through delayed consumption. According to

economics, investment is the utilization of resources in order to increase income or

production output in the future.

Investment definition according to finance, the practice of investment refers to the

buying of a financial product or any valued item with an anticipation that positive returns

will be received in the future.

RELATIONSHIP BETWEEN SAVINGS AND INVESTMENT

The amount of savings a country has is fundamental to finance new investments that the

country may wish to undertake. Savings are also important as they benefit the economy and

in the long term, help to give a higher level of life.

One part of a country's income goes to consumption and another part goes to savings. There

is a direct relationship between savings and investment.

In every economy:

Savings = Investment

Therefore, for a company to invest more, it should consume less and save a greater part of

its income.

We are going to try and explain why there is this equality (Savings = Investment) (Let's see

if we can!).

To simplify the explanation, let’s suppose that we are talking about a country that doesn't

have foreign trade (they don't export and don't import), their GDP is defined by:

Y = C + I + G

Where: Y (GDP), C (Consumption), I (Investment), G (Government Spending).

If we clear investment, we have:

I = Y - C - G (Equation 1)

On the other hand, the income generated will be destined to a part of the savings (S) and

another part to the consumption (both private "C", as public"):

Y = S + C + G

If we clear the savings (S) we have:

S = Y - C - G (Equation 2)

Now relating equation 1 with equation 2 we have:

I = S

Then, we have demonstrated (yes we have demonstrated) that saving is the same as

investment.

Live Examples:

Examples of Saving and Investment

The Facts

Saving or Investment?

The owner of Miller's Pizzeria has after tax

income of $50,000 this year. He spends

$40,000 on consumption, and decides to

save the rest by investing in a $10,000

certificate of deposit at the 87thNational

Bank. This brings his accumulated deposits

to $50,000.

$ 10,000 in saving. The word “invest” is

misused. The rest of the deposits

constitute savings, or cumulative saving.

The owner decides to purchase a new

$10,000 pizza oven, paying for it by taking

$10,000 out of the savings account at the

87th National Bank.

Investment.

In the next year, the owner decides to

purchase a new, high tech oven for $25,000,

paying for it by leaving $5,000 in earnings in

the business and taking an additional

$20,000 loan from the Bank.

Both. The new oven is an investment of

$25,000, and he saved $5,000 this year by

not taking part of the money out of the

business for spending.