Composition of National Saving (With Diagram)

National saving is equal to domestic saving plus foreign saving.

The composition of national saving is:

where S_H = household saving, R_E = retained earnings of corporations, T = tax revenue, G = government expenditure, X = exports and M = imports.

Here (T – G) is government budget surplus.

Companies save by not distributing their entire net profit as dividends among the shareholders.

Corporate profit (gross) = total sales revenue – total cost (of production and sale) less corporate profit tax = corporate profit (net) less retained earnings = corporate profit distributed as dividends among shareholders.

Companies retain a portion of their profit for three main reasons:

(i) To accumulate funds for expansion and diversification (internally, so as to reduce their dependence on the external capital market);

(ii) To pay steady dividends even in the face of fluctuating earnings over time; and

(iii) To provide funds for depreciation.