Difference Between Saving and Investment

Readers Question: what is difference between saving and investment?

Saving involves income that is not consumed. Typically surplus income is saved in a bank account. But, it could be saved as cash (cash under the bed e.t.c)

The Savings Ratio is the % of income that is saved. In recent years the UK and US have had low savings ratios as people have been encouraged to borrow and spend more. The credit crunch and impending recession is encouraging more to save.

Investment in economics is defined as an addition to the capital stock. (Gross fixed capital formation) For example, investment can involve spending on factories or new capital. Investment can also involve spending on human capital such as investment in training and education.

Note: In everyday terminology people refer to investing money in a bank, however, this does is not investment in an economic sense. It is saving.

Saving is a factor in influencing the level of investment. If there is an increase in savings, then banks can lend more to firms to finance investment projects. In a simple economic model, we can say the level of saving will equal the level of investment.

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5 Responses to Difference Between Saving and Investment

  1. MUTAI December 2, 2008 at 8:36 am #

    Well, how about now when we talk abuot using our surplus income in the financial sector, is that too refere to as incvestment?

  2. Long Nguyen March 31, 2009 at 5:46 am #

    great. thanks for that

  3. Asteria May 21, 2011 at 4:05 pm #

    your explanation is very good but it’s too short some time it can not understood you will have to add an explanation which every one can understand.

  4. Dave Norris October 18, 2012 at 5:10 pm #

    So what I call my investments, that is money I use to buy stocks in the stock market, should really be called savings? After all, except in the case of my buying an IPO, no one takes that money and buys new capital equipment with it.

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