Since 1975 the average propensity to save (APS) has decreased, however this has not been a steady decrease. The APS decreased until 1977 when it suddenly had a steep increase from 0.09 to 0.12 in 1980. From then onwards, with only one other small increase in 1984, the APS decreased drastically to 0.05 in 1988. The APS then increased to 0.115 in 1992, the highest it has been in 10 years. From 1992 till 1999 the APS gradually decreased back down to 0.05, the same as in 1980. From 1999 till 2006 the APS double-dipped, after increasing to 0.06 it dropped back down to 0.05 then increased by about 0.001 and then dropped again down to 0.04.
The main factors which affect saving in the economy are wealth, inflation, the rate of interest, the availability of credit, expectations and the compositions of households. All of these factors affect consumption as well as saving in the economy because these savings are the income which is not consumed.
The wealth of a household is made up of two parts. Physical wealth is made up of items such as houses, cars and furniture, whereas monetary wealth is comprised of items such as cash, money in a bank, stocks and shares, assurance policies and pension rights. If the wealth of an income increases, consumption will increase. This is known as the wealth effect. There are two important ways in which the wealth of households can change over a short time period:
1. A change in the price of houses. If the real price of houses increases considerably over a period of time, then households fell able to increase their spending. They do this by mainly borrowing more money secured against the value of their house.
2. A change in the increase of stocks and shares. Households react to an increase in the real value of a household’s portfolio of securities by selling part of the portfolio and spending the proceeds. The value of stocks and shares is determined by many factors. One of these is the rate of interest. If the rate of interest falls, then...