National saving is regarded as an income of nation, which is not utilized on government purchases or on consumption (Mankiw, 2009). Private saving is a name given to savings that is left with household after paying for consumption and taxes. Public saving is considered as tax revenue amount that is available with government after making all payments for its spending. However, the three variables are associated with each other in a way that national saving is equal to public saving and private saving, which can be considered from following equation
S = (Y-T-C) + (T-G)
National Saving = Private Saving + Public Saving
In order to compare sums of different times, present value concept is used. The present value of a future sum is regarded as an amount that would be required today in order to yield future sum at the prevailing interest rate. The present value points out towards the fact that the value of dollar is less as compared to value of dollar in future.
People are risk averse because they do not like uncertainty. Risk averse people use insurance and diversification in order to manage risk. They use insurance by paying fee to the insurance company that in return accepts all the risk or part of the risk. Insurance allows pooling of risk and make risk averse people better off. Diversification helps in reduction of risk by ensuring replacement of single risk with several smaller unrelated risks. Diversification is also effective enough in reduction of firm specific risks, and market risks. Firm specific risk is a risk pertaining to profitability of companies at individual level, and market risk is a risk that exerts its influence on all organizations that are associated with stock market.
References
Mankiw, N.G. (2009). Essentials of Economics. Canada: Nelson Education Limited
