2  How is saving measured?

Saving is generally defined as foregoing current consumption and providing funds (directly or indirectly) to capital markets for productive investment in financial, real or human capital (Boskin, 1988). Saving decisions by individuals, households and firms, or, by society collectively in the case of public saving are the outcome of intertemporal choices between consuming today or consuming in future that depend on a large array of interrelated economic choices and factors. These include expected future income flows from assets, labour supply, demographics, economic growth, government policy, preferences, the rationality of expectations, the degree of economic risks, the completeness of insurance markets, and the role of credit institutions.

There are two fundamental approaches to the measurement of saving. It can be measured in terms of “flows” as the difference between current income and expenditure. Alternatively, saving can be measured as the change in the “stocks” of accumulated net wealth (assets minus liabilities) from one period to the next. By observing the change in net wealth, the amount that was saved can be inferred. A change in net wealth can occur due to either “active” saving, when some of current income is withheld from consumption, or “passive” saving as a result of real increases in the value of existing assets (capital gains).

Saving rates in New Zealand (and elsewhere) are generally measured in terms of flows, derived from the System of National Accounts (SNA). It is a convention of national income accounting that total domestic saving must be equal to total investment, where investment refers to net domestic investment in domestic and foreign assets. If total investment in domestic assets exceeds the amount of domestic saving, the balance will come from drawing on the saving of foreigners. This inflow of foreign saving over a given time path corresponds to the current account balance for that time span and represents an increase in the net claims by foreigners on the future output of the economy.

The relation between aggregate saving and investment is depicted in Figures 2.1 and 2.2 for the years 1981 and 2001.[1] In 1981, about 45 percent of total investment needs were met by foreign saving. Over the ensuing two decades, total investment (in nominal terms) more than quadrupled, while domestic saving rose by less than two and a half fold. As a result the contribution from foreign saving rose to account for about 73 percent of all investment in 2001.

The derivation of the link between the current account, domestic saving and investment from the national accounts identities is contained in Appendix A1.

Figure 2.1 - Saving-investment identity for 1981 (dollar millions)

Sources: Statistics New Zealand, The Treasury and authors’ estimates.

Figure 2.2 - Saving-investment identity for 2001 (dollar millions)

Source: Statistics New Zealand, The Treasury and authors’ estimates.