In macroeconomics, business sector savings are equal to undistributed corporate profit plus capital consumption allowance. Below is the formula:
Business sector savings = Undistributed corporate profit + Capital consumption allowance
Undistributed corporate profits are part of company profits that remain in the business sector. In accounting, we call it as retained earnings.
Capital consumption allowance represents the amount of money that must be reinvested to maintain the productivity of existing capital. The amount is equal to the depreciation of capital assets.
So, businesses save when they don’t distribute profits, which they can use to invest in capital assets. Also, companies save (invest) when they compensate for the depreciation of their capital assets so that they can maintain the production capacity of current capital assets.
Compared to retained earnings, measuring capital consumption allowance is more complicated. That’s because there are various accounting methods in calculating depreciation. Thus, the method companies use will vary depending on the type of industry and the appropriate accounting standards.
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