Consumption and Saving Propensity Levels of Different Groups - Essay Example

? Economic Agents With the aim of maximizing profits, it is imperative for businesses to understand the dynamics characterizing consumer trends. This has the effect of better positioning the respective products and services in the competitive market. This will stem from the implementation well informed marketing strategies. The consumer decision making process entails understanding the factors affecting their purchasing decisions and the process as a whole. A prime factor affecting the spending power of consumers is the rate and extent of saving. This fashions a principal interest for economists as the dynamics associated with savings and consumption has a correlation with overall performance of the economy; both at a national and global level. Thus, the saving and consumption inclinations of people all through the course of their lifetime form an area of fundamental study. Instigators of this school of thought were Franco Modigliani and Richard Brumberg, his student at the time. This thought translates to connote that individuals hinge their consumption behavior on the level of expected income expected in the entirety of their lives. This paper explicates on this theme with the goal of arriving at the rationale propagating such ideologies. An economy will, presumably, undergo steady growth once the people decide to spend there cash; this ascertains the circulation of currency. This, amongst other factors, aids in ensuring the vigor of the economy is maintained. This is one of the rationales backing the measures instituted to instigate expenditure by citizens of a particular nation. However, in order to proficiently perform this feat, it is obligatory to understand the logic of the factor impede consumer spending. It is within this context that numerous theories have been proposed in an stab to explain this fact. Though numerous, one theory does dethrone all the rest. This is the theory of Life Cycle Hypothesis, universally referred to as the LCHO. The life cycle hypothesis explicates on the average propensity to consume to be hinged on life stages. It affirms that the young, middle aged and the old aged people have dissimilar consumption propensities, hinged on differences in their respective age and levels of income. The hypothesis extends to illustrate that the young and the aging community have the same level of propensity to consume. The two age groups have a large propensity to consume in relation to other age groups. The rationale in use is that the young population is borrowing against future income while the old population is using their savings. On the other hand, the middle aged population is epitomized by a greater propensity to save and consequently a lower consumption propensity. This might crop from the fact that, they are distinguished by relative higher income levels. A vast number of theories source their existence from a conceptual setup. They are formed to demonstrate the manner in which, variables of interest should behave in the real world. At times, however, facts in the real world may vary from results sourced from the conceptual framework. According to Sheldon Dazinger et al. (1982), the lifecycle hypothesis epitomizes such theories and hypothesis. Initially, the article cites the points with which it conforms. The authors concur that consumers do not hinge their consumption and savings decision solely on the basis of the income levels. There are some additional factors that presume a significant role in this decision making process. These additional factors are best exemplified by future expected circumstances and past experiences, which fashion the core feature in the decision. Past experiences are lessons that consumers take heed of, while future expectations are on the basis of their respective age and consequent income levels. Dazinger et al. set out to investigate if it could be proven that the young engage in saving while the old enage in dissaving activities. The studies factored in the saving tendencies of retirees and those individuals in advanced ages but are hitherto not retired. The variable of interest was the age difference characterizing different savings and consumption behavior. As maintaining objectivity is vital, the study opted to disregard supplementary reasons that were motivating the saving decision aside from age. This act is applaud-able as it purges biasness in the study. The accepted notion pertaining to saving is that the young have a higher propensity to save in relation to the aging population since they still have to prepare for retirement and meet increasing life demands. Thus, by extension, it is expected that the aging population will be epitomized by a large propensity to consume as a result of the reduced demands and expectations. This, however, was not the results the study arrived at. According to Dazinger et al. (1982), the aging population actually spends less and is still engaging in saving mechanisms. When contrasted to the no-elderly population, their propensity to save is essentially higher. This is with regards to the extent and rate of saving. The implication of these findings is far reaching. This arises from the fact that the Life Cycle Hypothesis structures the foundation of ideologies of saving and consuming. The authors give additional justification for their results by citing that the size of estates increases with decent in age. Though coherent, this assertion needs further substantiation. It would be flawed to ignore all other factors that could potentially be the source of this increase in size of the estates. The sample size adopted by this research does not guarantee the accuracy of these results. Though the authors have reiterated their measures in eradicating biasness, they were oblivious of their sample space and size. Though pointed out in their paper, the gravity of this error cannot be overestimated. The question now becomes whether or not the sample is representative of the whole population? This apparent saving culture might have been adopted when the aging population realized that, their accumulated wealth could not cater for their newly assumed consumption standards. This assertion cannot be contested, as it falls within the confines of reason. According to Dazinger et al. (1982), time might have transformed the aging population into consumption conscious individuals. This cannot be discounted as the lessons of time are known of significant essence in life. Aside from this, the most coherent rationale is that, this saving culture is motivated by the desire to bequeath their wealth (Dazinger, 1982, p 225). However, the authors are of the opinion that this is a trivial motivation for saving. Their assertion does not take into consideration the psychological impact of such a desire. In this respect, the aging population has no alternative other than to save their wealth. In justifying this assertion, the work by Blinder, Intergenerational Transfers and Life Cycle Consumption, is addressed. Blinder focuses, in part, on the dynamic of bequests in shaping the propensity to spend or save. He seems to believe in the existence of a correlation between bequests and consumption levels of the beneficiaries. When bequests are granted, the propensity to spend of the respective beneficiaries experiences a steady increase. It becomes higher as compared to the previous periods. Blinder’s primary focus, however, is the consumption and saving propensity levels of different social classes. He propagates the notion that there exist two primary classes of people, the reactors and the planners. Planners are those individuals who place utmost regard in planning for their financial future. According to Blinder, in the case of a bequest, a planner will plan the expenditure of the capital that has been left with the objective of securing a comfortable future. Planners view all financial interactions in context to the long term wealth. However, he does not proceed to give empirical substantiation for these assertions. This is best exemplified by their disregard for social security as it reduces their wealth, which is akin to negative bequest. On the other hand, Reactors are the complete opposite. These peoples face constraints fashioned by the capital markets. According to Blinder the means for grouping individuals into either reactors or planners is based on intergenerational transfers. At this juncture, he introduces the concept of human and non-human, financial, bequest as mediums for this intergenerational transfer (Blinder, 1976, p90). Binder opts to discount the factor of age in arriving at difference in saving and consumption propensity levels but rather opting to focus on intergenerational transfers. Various rationales have been propagated in an endeavor to explain factors affecting the propensity of consumption and saving. Mentioned herein, are two rationales. The first explicates on the aspect of age as the core distinguishing factor. The second rationale propagates the belief that people are divided into planners and reactors. As such, the manner in which an individual behaves economically distinguishes him as either planner or a reactor. In most scenarios, the reactors are the well off individuals while the reactors are those that face financial constraints. Both of these rationales are coherent, however, the most likely one has to be the latter. This stems from the fact that it has substantiated its facts and the results of its study. None the less, both literal works expound on this important aspect of the Life Cycle Hypothesis. References Blinder, A., 1976, Intergenerational Transfers and Life Cycle Consumption. AMERICAN ECONOMIC ASSOCIATION : 87-93. Dazinger, et al.,1982, The Life-cycle Hypothesis and the consumption behaviour of the elderly. Journal of Post Kenesian Economics: 208-227. Read More