Relationship between savings and gdp

relationship between savings and gdp

The savings ratio a big determinant of economic activity. Consumer spending accounts for 63% of GDP – dwarfing other areas, such as. savings in South Africa averaged just 15% of GDP between correlation, over time, between domestic savings rates and GDP growth. Past studies reveal a correlation between savings and GDP growth in the Third World. Those studies hypothesize that higher rates of savings cause higher.

A rise in the savings ratio can have a very significant impact on economic activity. A blogger, mentioned a minister, Liam Fox calling for more savings. Former cabinet minister Liam Fox has urged the government to freeze public spending for five years and use the savings to cut taxes and the deficit. Higher savings can help finance higher levels of investment and boost productivity over the longer term. In economics, we say the level of savings equals the level of investment.

Investment needs to be financed from saving.

relationship between savings and gdp

If people save more, it enables the banks to lend more to firms for investment. An economy where savings are very low means that the economy is choosing short-term consumption over long-term investment.

relationship between savings and gdp

To starve the economy of investment can lead to future bottlenecks and shortages. Short-term rise in savings Whilst in the long-term, savings are an important factor in determining investment. In the short-term, a rapid rise in savings can cause a fall in consumer spending which can lead to a recession.

The continued reluctance of consumers to spend is a significant factor in the continued economic stagnation. In this circumstance, a rapid rise in saving does not cause an equivalent rise in investment. Although banks see a rise in their deposits, they are reluctant to lend to firms — because the economic outlook is pessimistic. Also, in a recession, banks may not want to invest — even if banks are willing to lend at low rates.

A recession, usually sees a sharp fall in investment. The interaction between GDP and Savings which exists in theory does not exist in practice. Causal Relationship, Savings, Economic Growth.


After the great Depression ofthe main objective of all the nations of the world including India is to raise income and employment. To achieve this aim it is essential to increase economic growth.

It is necessary to raise Gross Domestic Product for economic growth. This can be achieved by high level of Investment and Savings. Governments may implement various kinds of policies such as encourage saving, stimulating investment and GDP in their countries. Investment contributes to growth in aggregate wealth. But the investment cannot be increased without increasing the amount of saving. Thus, savings perform a major role in providing the national capacity for investment and GDP.

Would an increase in savings help the economy?

This will affect the potentiality of economic growth. A serious constraint to sustainable economic growth can be caused by the low rate of saving.

relationship between savings and gdp

It is true that increasing aggregate savings contribute to higher investment and leads to the higher GDP growth in the short run. The role of domestic saving is important for promoting economic growth and lead to the higher GDPgrowth in the short run.

The role of domestic saving is important for promoting economic growth. The classical growth models support the hypothesis of saving promoting economic growth.

The neoclassical Solow model argues that the increase in the savings rate boosts steady-state output by more than its direct impact on investment because the induced rise in income raises savings, leading to a further rise in investment.

Further Carroll-Weil hypothesis contradicts with these arguments. The Carroll-Weil hypothesis Carroll and Weil, states that it is economic www. In the Indian context, empirical studies exist on the role of saving in promoting economic growth. Some empirical studies support the classical growth theory, some studies agree with the Carroll-Weil hypothesis and some do not support either of these. According to Sinhathere was no causality between the gross domestic saving and economic growth for the period to Therefore, the current study investigates the possibility of saving led growth and growth driven saving in detail using Granger causality test for testing the causality the logarithms of saving and logarithms of GDP in India.

Data source and Methodology. In this study annual data is used from to The data is analyzed to determine the causality between Growth and Saving. Before analyzing the causal relationship between Growth and saving, data has been transformed in to natural logarithms, and then possible existence of unit roots in the data is examined.

relationship between savings and gdp

The stationarity1 of each series is investigated by employing Augmented Dickey-Fuller unit root test2.