OPEC: The common abbreviation for the Organization of Petroleum Exporting Countries, which is an international organization of more than a dozen nations located primarily in the Middle East, Africa, and Central America that controls a sizeable portion of the world's petroleum reserves. This control over oil reserves gives OPEC significant market control, which it has been inclined to exert from time to time. The most noted time was the 1970s. OPEC raised oil prices from a scant $2 to $3 a barrel in the early 1970s to over $30 a barrel by the end of the decade. As an group of independent oil-producing nations seeking to monopolize the market, OPEC represents a textbook example of an cartel.
Visit the GLOSS*arama
Household saving that depends on income or production (especially disposable income, national income, or even gross domestic product). That is, changes in income induce changes in saving. Induced saving reflects the fundamental psychological law put forth by John Maynard Keynes. It is measured by the marginal propensity to save (MPS) and is reflected by the positive slope of saving line. The alternative to induced saving is autonomous saving, which does not depend on income. Induced saving is saving by the household sector that is based on the level of income or production. This is one of two basic classifications of saving. The other is autonomous saving, saving that is NOT based on the level income or production. In other words, household saving can be divided into: (1) a baseline amount of saving which, in theory, would be undertaken even if the household sector had no income and (2) additional saving that results from the income available to the household sector.
Saving is induced because people are prone to divert a portion of the income they have away from consumption. They do so in response to interest payments and to accumulate future purchasing power. If they have more income, then they are inclined (that is, induced) to save more. If they have less income, then they save less. Induced saving simply means that income is the most important factor affecting saving. Other factors are important, but income is at the top of the list. People cannot save if they have no income.
Induced saving is a complement to induced consumption. An increase in income induces the household sector to increase both consumption AND saving. This reflects the fundamental psychological law that John Maynard Keynes proposed as an essential difference between his theory and classical economics. He contended that people spend a substantial portion of extra income, but not all. The part not spent is diverted to saving.
Induced saving is reflected by the slope of the saving line and the marginal propensity to save (MPS). The MPS plays a key role in the value of the expenditures multiplier.
Induced Through An EquationOne way to illustrate induced saving is with the saving function, such as the equation presented here:where: S is saving, Y is income (national or disposable), c is the intercept, and d is the slope.
The two key parameters that characterize the saving function are slope and intercept. Induced saving is indicated by the slope of the saving function. Autonomous saving is indicated by the intercept.
The connection between consumption and saving shows up in the saving function. The consumption function is commonly specified as:where: C is consumption expenditures, Y again is income, a is the intercept, and b is the slope.
- An Induced Slope: The slope of the saving function (d) measures the change in saving resulting from a change in income. If income changes by $1, then saving changes by $d. This slope is generally assumed and empirically documented to be greater than zero, but less than one (0 < b < 1). It is conceptually identified as induced saving and the marginal propensity to save (MPS).
- An Autonomous Intercept: The intercept of the saving function (c) measures the amount of saving undertaken if income is zero. If income is zero, then saving is $c. The intercept is generally assumed and empirically documented to be negative (a < 0). It is conceptually identified as autonomous saving.
Because income not spent is saved, the saving function can be specified as:where: S is saving and Y is income. However, now the intercept is -a rather than c and the slope is (1-b) rather than d. This alternative specification shows the connection between the saving function and the consumption function. The intercept of the saving function (-a) is the negative of the intercept of the consumption function (a). The slope of the saving function (1-b) is one minus the slope of the consumption function (b), meaning that extra income induces and is divided between consumption and saving.
Induced Through A Line
Another common way to identify induced saving is with a standard saving line, such as the one presented in the exhibit to the right. This is reasonable because the saving line is a graph of the saving function. The red line, labeled S in the exhibit, is the positively-sloped saving line for the equation: S = -1 + 0.25Y. This line indicates that greater levels of income generate greater saving by the household sector.
The two primary characteristics of the saving function--slope and intercept--are also identified by the saving line.
- An Induced Slope: The slope of the saving line presented here is positive, but less than one. In this case the slope is equal to 0.25. Click the [Slope] button to highlight. Once again this is induced saving and the marginal propensity to save (MPS).
- An Autonomous Intercept: The saving line intersects the vertical axis at a negative value of -$1 trillion. Click the [Intercept] button to highlight. And once again this is autonomous saving.
Other Induced ExpendituresSaving is only one of several induced variables that enters into the study of Keynesian economics. Of course, the complement of saving, consumption, is perhaps the most important induced variable. The other three aggregate expenditures--investment expenditures, government purchases, and net exports--are also induced by income and production.
Other components of the macroeconomy are also related to, or induced by, income and production. One important induced component is taxes. In particular, sales and income taxes are directly related to income. More income invariably means more taxes. Another induced component is the demand for money. Because expenditures use money, an increase in income not only induces expenditures, it also induces the demand for money.
- Investment is induced by income because an expanding economy generally boosts business profit, which is then used for investment expenditures on capital goods.
- Government purchases are induced by income because extra income generates more tax revenue (especially state and local tax revenue), which is then used by government to finance expenditures.
- Net exports, the difference between exports and imports, are induced through imports, which are induced in the same fashion as saving. An increase in income is not just used to purchase domestic goods, but also imported goods.
INDUCED SAVING, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 25, 2024].
Check Out These Related Terms...
| | | | | | | | | | | | | | | |
Or For A Little Background...
| | | | | | | | | | | |
And For Further Study...
| | | | | | | | | | | | |
Back to the WEB*pedia
Today, you are likely to spend a great deal of time driving to a factory outlet hoping to buy either semi-gloss photo paper that works with your neighbor's printer or a birthday gift for your father that doesn't look like every other birthday gift for your father. Be on the lookout for pencil sharpeners with an attitude.
Your Complete Scope
This isn't me! What am I?
The first U.S. fire insurance company was established by Benjamin Franklin in 1752 in Philadelphia.
"Success without honor is an unseasoned dish; it will satisfy your hunger, but it won't taste good. "
-- Joe Paterno, Football coach
Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.