Why do we say that increased savings rate increases economic growth?
Doesn’t it mean that when you increase savings rate, you have less of an economic growth because people are spending less now and saving more for the future?
When Saving rate is increased, economic growth increases due to more capital is available to investors at the reduced int. rates. Therefore, this will lead to an increase in investment in the capital stock.
im still not getting it. Please dont mind my stupidity.Basically you are saying that saving rate is the number of people who actually save. So if more people save, that means we have more available for future economic growth meaning more money available for capital investment. Am I understanding correctly? But if we save more now, wouldn’t that also mean that currently that money that is being saved wont be used for the growth right now?
Do you associate “stupidity” with “not knowing”? Well this is not the case. Learning is an interest. You cannot learn unless you don’t know first.
I am not. Saving rate is the amount of money, expressed as a percentage or ratio which one deducts from his/her disposable personal income to set aside for retirement or investment.
Yes. Saving = Investment. In economics, the level of savings equals the level of investment as investment needs to be financed from saving. When people save more, the banks have more money to lend. Therefore, they will lend more to firms for investment.
When savings are low means the economy is choosing short-term consumption over long-term investment. So, the economic growth suggests the level of savings is a key factor in determining economic growth.
In the short-term, a rapid rise in savings could cause a fall in consumer spending which can lead to a recession. In this case, a rapid rise in saving does not cause a rise in investment. Even banks have more money to lend now but they will be reluctant to lend to firms because the economic outlook is not good. A sharp fall in investment is inevitable.
However, in the long-term, savings are an important factor in determining investment.
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