Social Security and Savings: The Extended Life Cycle Theory - Research Paper Example

The paper "Social Security and Savings: The Extended Life Cycle Theory" is a wonderful example of a research paper on macro and microeconomics. The issue of saving has been a problem since the dark ages. During the 1930 depression and the 2nd world war, many economies were characterized by high levels of unemployment and inflation. Investments were inevitable to revive such economies. This was only made possible by changing the levels of consumption and saving. The fact is that investments and savings are core for the growth of the economy (Miller (1988).

Most nations across the world appreciate the importance of saving in the economy. Regardless of whether they are developed or they are developing, saving is taking place in all the economies in the world. But the developed nations tend to save more compared to their counterparts that are developing. As a matter of fact, the general trend in the world is that people who earn less (low-income earners), consume more and they save less. On the other hand, the individuals who earn more (high-income earners), tend to save more (Paxson, 1996).

The Netherlands as a nation is not exceptional since the country is exposed to those who earn more and those who earn less. Majority of those who earn less appear to save less and consume more, while those who earn high levels of income tend to save more. This trend of saving can be associated with the levels of inflation that affect the purchasing power of individuals. An increase in the levels of inflation in a country implies that the purchasing power of an individual will also increase. This state forces the individual to spend more money to buy goods, and what one is left with is so little which explains the low saving levels (Taylor, and Woodford, 2001).

This research study is based on the consumption theory. The theory of consumption is used because of the relationship existing between saving and consumption. Saving can thus be described as the part of income that is not consumed. Different economists contributed to this theory. Keynes said that consumption depends on absolute current income. Ando-Modigliani argued that consumption depends on an individual’s lifetime income. Friedman argued that consumption depends on permanent income and introduced an aspect of the present value of income (Modigliani, 1990).

Deussenberry argued that consumption depends on relative income. Keynes theory was adopted since the study was aimed at the relationship between saving and the current disposable income.