what is the relationship between savings,investment and capital stocks????

Expert Answers
gsenviro eNotes educator| Certified Educator

Savings is the difference between income and expenditure,

i.e. savings = Income - Expenditure

Investment is the expense towards increasing net capital stock (i.e. fixed capital formation). Investment is also considered a savings and any expense towards investment is not counted as expense. For example, a farmer has an annual income of $100,000 and spends $50,000 on consumer goods and services, while $20,000 is spent on buying new machinery (including harvester, irrigation system, etc.). In this case, saving would be $100,000-$50,000 = $50,000 (including $20,000 investment).

In general, higher savings means higher investment. If people are saving more money, banks and financial institutions will be able to lend more money for investment and hence higher capital stock formation in the economy. In simplest terms, level of savings can be equated to level of investment and level of capital stock formation.