Households Sector

Purpose and Perspective

The Households Accounts sector represents how various economic flows are combined to determine household income, and how this income is split into consumption and savings, part of which eventually becomes investment.

For the sake of simplification, we assume that all the value-added created by the economy is transferred to households, which pay all domestic taxes and duties. In other words, we do not separately consider that part of the value-added is retained by the firms, taxed by the government and eventually directly re-invested. Thus, the saving-investment behavior of firms is assimilated to that of households. More specifically, we assume that households’ saving-investment behavior is fundamentally affected by their income level and by the average return on investment from productive activities.

Model Structure and Major Assumptions

Exogenous Input Variables

  • Private Current Transfers As Share Of Gdp – Units: Dmnl

  • Private Factor Income As Share Of Gdp – Units: Dmnl

Initialization Variables


Modeling Details

Saving behavior in the households sector is represented at the percentile level. Through the use of subscripts, households are separated into percentiles in the income distribution sector. Based on such classification, in the households sector saving is separately calculated for each percentile, which is fundamental for the assessment of long-term trends in income distribution.

Although we consider average return on investment as driver of savings, we do not assume that households have perfect information about the market and correctly anticipate future conditions, towards satisfying a set of optimization conditions. We assume that saving behavior changes gradually, as return on investment changes, and the intensity of such change is based on empirical observation.

Footnotes and References

[1] Dynan, K.E., Skinner, J. & Zeldes, S.P. (2004). Do The Rich Save More?. Journal of Political Economy, 112: 397-444.

Keynes, J.M. (1936). The General Theory of Employment, Interest and Money/ New York and London: Harcourt, Brace and Co.

Stiglitz, J.E. (1969). Distribution of Income and Wealth Among Individuals. Econometrica, 37(3): 382-397

[2] Arrow, K.J. (1964). Optimal capital policy, the cost of capital, and myopic decision rules. Annals of the Institute of Statistical Mathematics, 16(1): 21-30.