National saving is equal to domestic saving plus foreign saving.
The composition of national saving is:
where SH = household saving, RE = 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.