Skip to content

Lesson M02.L04: Savings, Wealth, and the Household Balance Sheet

Module: Measuring the Price Level and Inflation; Savings and Wealth Level: intro Duration: 30 minutes Learning Objective: Define saving (flow) and wealth (stock); interpret Australian household balance sheet data; distinguish private, public, and national saving. Provenance: OpenStax Macro 3e | MIT OCW 14.02

Explanation

Two related but distinct concepts underpin household finance in macroeconomics:

Saving (a flow): The portion of income not spent on consumption during a period (e.g., a year or quarter). If a household earns $100,000 and spends $90,000, it saves $10,000.

Saving = Income − Consumption

Wealth (a stock): The total value of assets owned minus liabilities owed at a point in time. Also called net worth.

Wealth = Assets − Liabilities

Saving adds to wealth over time: saving is the flow; wealth is the accumulation.

The household balance sheet in Australia:

The ABS publishes household balance sheet data (cat. 5232.0 — Australian National Accounts: Finance and Wealth). Key 2023 figures (approximate):

  • Household assets: ~$16 trillion
  • Superannuation: ~$3.5 trillion
  • Dwellings (property): ~$9.5 trillion
  • Financial assets (shares, deposits): ~$3 trillion
  • Household liabilities: ~$2.7 trillion (mostly mortgages)
  • Net household wealth: ~\(13.3 trillion (~\)500,000 per capita)

Types of saving:

  • Private saving = Household saving + Business saving (retained earnings).
  • Public saving = Government revenue minus government expenditure (a budget surplus is positive public saving; a deficit is negative — "dissaving").
  • National saving = Private saving + Public saving.

National saving funds domestic investment. If national saving falls short of desired investment, the gap is filled by borrowing from abroad (a current account deficit).

Australia has historically run current account deficits, indicating national saving has been insufficient to fund all domestic investment — foreign capital fills the gap.

Worked Example

Australian household: Saving rate calculation

The ABS household saving ratio (saving as % of disposable income) for selected years:

Year Saving Ratio
2019 5.0%
2020 22.0% (COVID lockdowns; spending collapsed)
2021 11.5%
2022 6.5%
2023 3.2% (cost-of-living pressures)

Worked balance sheet example:

Asset Value
Home (Sydney) $950,000
Superannuation $280,000
Shares/deposits $70,000
Total Assets $1,300,000
Liability Value
Mortgage $450,000
Credit card $5,000
Total Liabilities $455,000

Net Wealth = $1,300,000 − $455,000 = $845,000

If this household earns $120,000/year and spends $108,000, it saves $12,000 — adding $12,000 to net wealth (assuming asset prices unchanged).

Common Misconception

Misconception: "Saving" and "investment" mean the same thing — putting money into shares or a managed fund is saving and investment.

Correction: In economics, saving means not consuming income. Investment means spending on new capital goods (machines, buildings, software). Buying existing shares is a financial transaction — it transfers ownership of existing assets, not creation of new capital. When you deposit money in a bank, you are saving; if the bank lends it to a business that builds a factory, that business is investing. The terms refer to different economic activities.

Practice Prompts

  1. A household has assets of $800,000 (home $600,000, super $150,000, car $50,000) and a mortgage of $300,000. What is its net wealth? → Answer: $800,000 − \(300,000 = **\)500,000**.

  2. The federal government runs a \(30bn budget deficit this year. What is public saving? → **Answer:** Public saving = **−\)30bn** (negative saving; the government is dissaving by spending more than it earns).

  3. Australia's national saving rate falls while desired investment stays constant. What happens to the current account? → Answer: The current account deficit widens — the shortfall in national saving relative to investment must be financed by net capital inflows from abroad (foreigners lending to or investing in Australia).

Further Resources