The level of income and savings drawn from current income has generated much interest among economist and policy makers since 1936. the limiting factor theory and the vicious cycle theory of underdevelopment explain that countries like Cameron, babon, chard, Nigeria, Latin America sudden and many more are poor because their real incomes are cons as such a large percentage of these real income is directed towards consumption rather than towards production. High consumption means low savings, low investment and low capital formation and low capital formation translates to low productivity hence low real income and the process continues.

            Consumption and savings one two of the key of macroeconomics aggregate in economy. They are crucial in determining an economics equilibrium level of employment and aggregate income hence they are determining variables
            Consumption is simply defined as the value of goods and services bought by people and individual buying acts are aggregated over time and space.
            According to Anyanwu (1995) consumption is the total demand for all consumer goods and services to satisfy human wants. Frank and Bernake (2001) defined consumption as the spending by households on goods and services such as clothing, food items, entertainment, health services and acquisition of assets among others.
Paragraphs rising from this definition is the concept of consumption function which shows the relationship between consumption and disposable income. Consumption is referred to households expenditure on goods and services which yield utility in the current period of final goods and services.
            This definition effectively excludes expenditure on goods and services that were produced in a previous accounting period.
            Consumption expenditures constitutes a key component of aggregate expenditure used in national income determination which in its broadest form can be written for an open economy as: y = (c + 1 + s + x – m) in Keynesian economic analysis, savings represents the difference between income and consumption. The reason is that income is either consumed or saved.
            Thus saving is defined as the amount of income per time period that is not consumed by economic units. For the household it represents that part of disposable income not spent on domestically produced or imported consumption of goods and services. For the firm, it represents undistributed business profits. In all savings is a flow variable, being measured overtime.
            An understanding of the meaning and behaviour of various concepts of consumption and savings are necessary. These concepts include marginal propensity to consume average propensity to consume as well as marginal and average propensity to save.
            The MPC refers to the fraction of additional disposable income that is consumed.
            Keynes economic analysis assert that “men are disposed as a rule and on the average, to but not by as much as the increase in their income. In summary therefore, the marginal propensity to consume is the ratio of change in consumption to the charge in income which is symbolically represented thus MPC = ∆ c/∆y
            Since what is not consumed is by definition saved, the marginal propensity to save can be the ratio of change in savings to the charge in income (disposable or national) symbolically, it can be written thus MPS = ∆ S/∆y
            L          like the MPC, the value of MPS is greater than zero but less than one. Greater than of their additional income but less than one because they will not increase their consumption by as much as the increase in their income,
            Thus MPC + MPS = 1
The foregoing analysis shows that both MPE and MPS are in the same term as the rate of change of consumption (savings) with respect to disposable or national income.
            This refers to the fraction of total income that is spent on consumption. Being the ratio of total consumption expenditure by total income.
            Symbolically APC is expressed as C/Y
APS is that proportion of income that is devoted to savings. Since it is the fraction of income that is saving to the income (disposable, national)
            There are number of theories purporting to explain the behavior of consumption in both the short and long run. These existing theories include
i.          Astute income Hypothesis
ii.         Relative income Hypothesis
iii.       Permanent income Hypothesis and
iv         life cycle Hypothesis of consumption
            The A/H is the oldest theory of consumption and and was a fall out of Keynes “psychological law” ITS emphasis was that an individual’s consumption decision was based upon the absolute level of his current income.
(1)       Consumption and saving are functionally and directly related functions of disposable income.
The relationship is a stable one.
(2)       They can exhibit non linear relationships. In this case we will find that the MPC falls as income rise and MPS rises as income rises.
(3)       The APC falls with increase in income but it is greater than MPC. This feature exists at an intercept term in the consumption function.
This means that at very low income levels consumption spending could actually out ship income
            Consumption function here can be examined thus
            C= a + by d
From this relationship our MPC is dc/dyd cd
                                                            APC is (a + byd
Problems of AIH
The AIH was as subjected to empirical verification by kunzites. The AIH assertion that the APC would decline with increases in income as well as its assertion of a stable consumption function over the business evidence. The AIH exhibited consistency when tested with data collected from a sample of household and classifying them according to their income groups. Moreover, it was consistent with empirical evidence obtained from annual data of real income and consumption for the economy as a whole (short-run time-series data) However, it was inconsistent with the empirical evidence obtained when it was tested using trend values of consumption and income collected over a long period of time. Long-runtime-series data are characterized by a smoothening out of cyclical fluctuation in time-series overtime.
Test the AIH with this type of data showed on APC that exhibited constancy with no tendency to rise or fall as income fell or rose. From mathematical view point the explanation of the failure of is found in the existence of the intercept term. APC equal MPC with a zero autonomous consumption function, because both APC and MPC will be equal in the absence of the intercept term, both will exhibit constancy dor all levels of incomer, Research effort were however directed at resolving the first problem of an unstable long in APC, First the observed long in constancy was a denial of Alvin hypothesized the possibility of an increasing  to result in the   economy being surfeited with capital good In the long nun bringing about an inadequate” investment outlet to channel the extra sarongs  back in the spending stream” what was left was for researchers to establish the invalidity of the hypothesis following the empirical result form the AIH.
The second was that of trying to reconcile the conflate that was apparent in the different sets of statistreal result. The efforts that were made in this regard resulted in the formulation of other consumption hypotheses. These theories included the Relative income hypothesis, the permanent income Hypothesis and the life cycle Hypothesis. These hypotheses in addition to trying to reconcile the conflict that emerged from testing the AIH using different set of statistical data also tried to overcome a second defect in the AIH. That defect was its failure to incorporate the role of wealt and interest rate as we find in the micro economic analysis of consumption behavior in the explanation of consumption.

The RIH was development James Queensberry in 1979. This theory was based on idea that were not considered in earlier economic analysis these are
(1)       That consumption behaviour of individuals was influenced by consumption behaviour of other individuals.
(2)       That the consumption behaviour of individuals exhibits a “ratchet effect” deriving from the fact the consumption behaviour tends to be habitual:
This habitual nature shows that people try to maintain the fact that they may have experienced a decline in income not with-standing.
            Dusenberry posited that an individual’s consumption and saving decision are influence by social environment. Thus, given a level of income, an individual is likely to consume more of that income if he lives in environment dominated by the well-to-do in society than if he lives in less affluent neighborhood. Moreover efforts by the individual to maintain a certain economic status in his neighborhood means that he spend more out of his income to maintain that status. Thus, his consumption, rather than being related to his absolute level of income would be related to his relative income within his neighbourhood. This makes for a constant average propensity to consume given a relatively constant income distribution. Moreover, it makes for a proportional relationship between aggregate consumption and aggregate disposable income.
The graph below illustrates Dusenberry’s explanation of proportional/ no proportional relationship of consumption and disposable income.
            The PIH as proponded by Milton Friedman attempt to explain the proportional/non proportional relationship between consumption and disposable income. Its basic premise is that consumption decisions are not based solely on the current level of disposable income but on past and expected future income as well.
            Friedman also thought of consumption as being decomposable into two viz permanent and transitory consumption. Hence we can write C = Cp + C transitory consumption were (i) It was uncorrelated with permanent income and more controversially, it was uncorrelated with transitory income.
            The CMX of the PIH then was that permanent income YP determines permanent consumption cp. So cp is proportional to yp this relationship can be stated as cp = kyp where k is the factor of proportionality. It is constant equals the MPC and APC. The proportionality relationship specified above implies therefore that households consume about the same proportion of their permanent income and this relationship is expected to hold the distribution of permanent income notwithstanding.
            Because permanent consumption and permanent income are long run trend values of consumption and income the hypothesis is consistent with long run time sense data which suggests that APC is constant. In conclusion the theory proposes the proportional nature of the basic long run relationship while predicting a short run non proportional relationship for cross section data.
            One unless implication of the PIH is that unless consumers perceive the increase in their income as permanent rather than transitory, any change an appreciable impact on their consumption behaviour appreciable impact on their consumption behaviour. The implication of this for policy designed to affect disposable income in far reaching it means that consumer’s failure to adjust their expenditure in response to a change in disposable income brought about by a fiscal policy action desyned to affect output and employment will hardly be expected to exert the desired impact if consumers as the charge in disposable income as transitory.  
The major defect of the PIH is elusive nature of the key variables in the hypothesis. These variables are permanent income and consumption. Being elusive these key concepts are difficult to isolate and utilize for statistical testing of the hypothesis. Past experiences and expectation brings about determines a household permanent income, yet this can change overtime. Thus while it is difficult to obtain a measure of permanent income at the micro economics level, the difficulty is by no means lees when wered from the macroeconomic level.
            Economic unit should base their consumption decision on expected life time income instead of current income. The LCH considers the possibility of consumer unity’s saving in “fat years to smooth out consumption in “lean years” the L C H posits that individuals wish to spread life time income such that they would enjoy a pattern of consumption that is optimal over their years lab our income is usually higher tow ever it drops to zero on retirement and any consumption after retirement will be financed from accumulated after wealth the graph below can be used to explain the foregoing Issues in the LCH.
The diagram deputes the par tem exhibited by income earnings and consumption in the life cycle of the individual. Low in early years of his working life. Rising in the middle of his career and again low at retirement. The central preposition of the LCH is that it is rational for the individual to borrow in the early years of his working  life to finance his consumption needs repay the borrowed funds in the middle of his carrier when his income with in this phase of his working life and use the saving to finance consumption on retirement.
Like the PHI the LCH cannot be subjected to the rigors of empirical testing because of the unobservable nature of one its key explanatory vandal’s v12, the expected lab our income. John muellbaeur argued that“the inability to observe life cycle income has protected the hypothesis form serious testing and the possibility of rejection.    
CONSUMPTION: is an important single component of aggregate expenditure firms produce goods and service become they are demanded. It is appropriate to say therefore that it is the level of aggregate expenditure that influences indirectly the level of aggregate income hence has direct influence on production. Therefore we examine the factors that determine these aggregate expenditure relationships J.M Keynes had asserted that the determinants be group into two: Objective and subjective factor
This are specific and quail gable factors that determine how much of their disposable income people are willing to spend on consumption among these factors are
1.         The level of income: the principal factor affecting an individual’s consumption expenditure is his level of income. It is a vital determinant of the proportion of disposable income that goes into consumption spending
2.       Income distribution: the distribution of income in the economy has an influence consumption expenditure too. It is usual that people in the higher income brackets have a lower tendency (propensity) to consume out of a lower tendency those in the low income bracket having met their basic needs tend to spend less on such needs as compared to those who are in the low income bracket that are yet to meet these needs. Since the income distribution is in the favors those in tighter income bracket and vice versa.
3.       Price level ==> this determinant of consumption expenditure is in conformity with the ordinary law of demand. The influence of price level on consumption is an inverse one with price increase reducing consumer’s purchasing goods and services but increasing same with a fall in the price level.
4.       Availability of credit: it is an important determinant of consumption expenditure in that credit availability makes it possible for the consumer to temporarily make purchase in excess of that he can make given his income or cash holdings alone. Because credit availability enlarges the consumers scope to purchase goods and services. Credit availability positively influence the level of consumption expenditure in the economy.
5. Cost of credit (Interest Rate): Closely related to credit availability as determinant of consumption expenditure is the cost of credit, usually proxied by the interest rate. Consumers generally pay a price by way of interest payment on the credit facilities enjoyed by them.
6.Fiscal Policy: Taxation one of the key weapons of fiscal policy influencing consumption expenditure via its effect on consumers disposable income. Tax increases reduces consumers’ disposable income and therefore their consumption expenditure and vice versa. Moreover, government expenditure, another key fiscal policy too influences consumption expenditure positively. Increased government expenditure by way of transfer payments and other unemployment benefits serves to increase consumption expenditure vice versa.
7.       Depreciation Allowance: Higher depreciation allowance (amount set aside for tear and wear durables) translates to higher level of consumption expenditure vice versa.
8.       Stock of Durable Assets: This factor affects consumption spending positively and negatively. Possession of such durable consumer goods as video tape, radio, cars and television set etc by a consumer, reduces or eliminates his expenditure on same at least within expenditure negatively. However, the possession of these durable assets positively affects consumption since they, encourages consumer to purchase other goods they encourages consumer to purchase other goods they would not have purchased. Example the possession of video tape necessitate the purchase of video cassette, video head cleaner etc. another example is the possession of a car which necessitates the owner allocating a part of his total expenditure to purchase a fuel spark, plug, brake, fluid etc on a regular basis.
Apart from the objective quantifiable determinants of consumption, other factors play a role in determining the aggregate level of consumption expenditure. These non-quantifiable subjective factors, Keynes referred to as psychological factors. These factors include
1.       Precaution: Those who intend to provide for exigencies or emergencies engage in lesser consumption activities than those who do not bother such. Here consumption expenditure are influenced by consumer feeding about the need to be precautions about the future.
2.       Avarice:        Avarice influence on consumption expenditure can be explained by the desire or otherwise of individuals to bequeath estate to their succeeding ones. Those who desire to bequeath estate to their successors engage in less consumption where as those who do not desire to same tend to consume more than their counterparts that aspire to do so.
3.       Social Pressure/Peer Group Influence: This has to do with the individual’s feeling regarding the desirability necessity to live up to societal expectation in terms of his consumption habit or life style. Example in Nigeria where an individual social standing is determined by the types of cars he owns.
           The individuals’ consumption is also influenced by his peer group. He spires to maintain a life style that is at par with that of his peers. This is referred to as peer group influence. This can also be referred as keeping up with the joneses.
4.       Consumer Expenditure: positive expectation about future income will logically permit an individual to spend more of his current income on consumption than if his expectation about future income were negative. If his expectations are negative, it becomes a rational act to retain from consumption spending in the present period so as to be able to meet his consumption needs in the future when his expectation of a fall in income would have been realized. The converse reasoning holds for an individual with a positive expectation about future income.
            Also consumer’s expectations of the future course of price movement, expected lower level of prices tend to make consumers withhold their consumption expenditure in the present period with a view to taking advantage of the anticipated fall in the price level when it materializes and vice versa.
Determinates of savings
Savings being that portion of disposable income that is not devoted to current consumption. This definition of savings is regardless of the use to which all such unconsumed income may be put. Saving occurs only in the absence of consumption in discussing the determinants of savings therefore, a number of factors can be undentifeid. These factors are also grouped into:
i.          Objective factor
ii.         Subjective factor
These are quantifiable and verifiable determinants of savings. These factors include.
1.         The level of income: individual with higher  levels of income tend to save more than those with lower levels. High income levels make it possible for individuals to meet their consumption demands while leaving them with an equal high level of unconsumed income (savings).
2.         Level of Interest Rate: Where as interest rate impact negatively on consumption expenditure, its influence on savings is positive. Low rate of interest constitute a poor returns on savings especially if such savings are held in form of financial assets such as bank deposits. Consequently savings tend to be low when the interest rate is low such that it is not attractive enough to compensate savers for their decision to abstain from consumption in the current period.
3.         Availability of savings facilities: people’s propensity to save ten to rise with the availability of outlets into which their saved funds can be channeled. Example, the availability of a saving outlets like commercial bank can help ginger people’s enthusiasm to save. The importance of this factor can better be appreciated if we imagine an economy in which such facilities do not exist to channel savings from savers to investors. People tend to save more in the presence of savings facilities than if they were non-existent because it will encourage savers to interact with investors an interaction that would have been thwarted in their absence.
4.         Inflation Rate: the prevailing rate of inflation largely influences people’s savings decision because of its erosive effect on the value of saving especially if such savings are held in the conventional form of bank deposit the reasons is that high rates of inflation erodes the purchasing power of money thereby discouraging people from savings since the value of such savings will be wiped out by the deleterious effect of inflation.
Future expectation of inflation & interest Rate income determines the level of savings in the cement period. Example
1.    expected higher level of income in the future  will tend to stunt the savings rate in the current period since such expectations reduce pressure on individuals to “set something aside for the rainy day”.   Example
2. Expecations about the future course of interest rate also tend to influence savings behaviour individual reduce their propensity to consume with a view taking advantage of the expected higher interest rate when it is realized. So do lower expected interest rate in the future tent to elicit more savings in the present period since savers will act to take advantage of the higher interest rate in the current period relative to the expected tower rate in the future.
Example .
3.        Expectations about the future course of inflation rate influence individual’s savings decisions in the present period. Expectations of high rates of inflation could gagmen individual’s enthusiasm to save since the value of their savings in the future period when the expectation about inflation have been realized will be worthless than its value in the current period when the savings decisions were implemented. On the other hand however, inflationary expectations could prompt individual to save more in the present period so as to be able to use their increased savings to cushion the therefore from these analysis execratively about the future course of certain factors largely influence savings behaviour in the present period.
These are the non-quantifiable and non-traceable factors that inflation savings largely. They are psychological in nature. These factors include
1.        the instinct for precaution: Individuals who bother about the unknown future would tend to be more precautions in their consumption propensity in the current period than individuals who do not their desire to proved for the unknown future propels them to devote a greater proportion of their of their income to savings than would be deviled by individuals who are less futuristic in their outlook. The concept is the relater the individual’s instinct for precaution with respect to the unknown future, the higher has savings rate will be.
1.        Cultural factors and Habit where it is the norm for individuals in society to abstain from consumption the savings rate tend to be characterized by ostentations way of life with emphasis
3.        Desire for Bequest : Individuals who wish bequeath a portion of their life earrings to their success dings ones tend to save more than those who do not aspire to do same. Individual in this category tend to consume a greater proportion of their income since they seem to be careless about their successors.
“In 1961-1880 the role of actual price level (inflation) in determining the savings behaviour in Nigerian economy cannot be said to be strong” according to Iyahen.
           He detected also that “a some what positive relationship between expected inflation and the level of personal, savings” on the relevance of existence of savings outlet in influencing savings behaviour, he concluded that although this variable implying that “a larger number of banks in Nigeria may encourage savings behaviour”. It was a weakly significant determinant. In addition he found out that the income variable “ is positively related to savings which indicates that people are more willing and able to increase their savings when their income is high than when it is low” this is quite truth because a higher disposable income encourage positive attitudes towards savings.
           Finally, an empirical study by the World Bank taken in certain countries showed that personal savings mobilization was susceptible to the influence of real interest rate. Infact, it was showed that savings responds to substantial increases in interest rate.

Consumption is the major component of aggregade demand consumption and savings is the one to the relationship between consumption and saving the determinant work, the opposite to saving line.
           These factors are also responsible for rise and fall in investment sector of the Nation Consumptions clearly reacts to economic climate individuals and household consumption varies in value and composition. An increase of consumption raises gross demotic product (GOP) by the same amount. We have the conceptual framework that determines consumption expend the absolute income hypothesis determine that current income consumption expenditure is a function of current disposable income, as income increases, consumption expenditure increases but at a decreasing rate.
           Relative income hypothesis postulate that one’s consumption behaviour is influenced by that of his neighbour or environment permanent income hypothesis states that consumption is a function of permanent income rather than current disposable income life cycle hypothesis that consumer allocates his income so as to maximize satisfaction over his life time.

Adetotun P. (1978): “Nigerians public consumption expenditure; the journal of economics and social studies

Anyanwu, C., (1995): Theory and application in Nigeria” modern macro economics

Anyanwu, C., (1995): “Revenue allocation and stable fiscal Federalism in Nigeria” journal of economic management, 2(2) 1-28.

Davial, T. E (1952) “The consumption function as a tool for prediction” Review of economics and statistics, pp. 270 – 277.

Hall (2001) “ Stochastic implications of the life-cycle, permanent income hypothesis: theory and evidences” Journal of political economy.

Jhingal, M.L (2003): Macroeconomics Theory. New Delhi, 12th enlarged revised edition.

Koutsoyiannis, A. (1985) An introduction of econometrics’, Macmillan

Koutsoyiannis, A. (2001): Theory of econometrics palgrave publisher, 2nd edition, pg 105.

Okechukwu, O. (1998) “An examination of the Keynesian consumption function in Nigeria, 1975-1994” Rivers journal of the social sciences. Pp 34-42.                     
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