Impact of Saving Rate on Economic Growth

Impact of Saving Rate on Economic GrowthNURU ABUBAKARINTRODUCTIONSaving array is the amount of coin, expressed as a percentage or ratio which one deducts from his/her disposable personal income to set aside for retirement or for investment in the money or the capital market in instruments like bonds treasury bills, shares etc. Savings lay out can also refers to the percentage of rough-cut domestic proceeds (GDP) that is saved by households in a country (Ewa and Agu 2005). This indicates the financial state and ripening of the country because households nest egg constitute the major source of judicature borrow to finance macrocosm projects and also provides funds for underground investments. It is an obvious fact that income is sure as wages or salaries, rents, participations or profits by owners of factors of production. With the received income households buy the consumer goods they need. Not all(a) personal income available to the individual or family, or the househo ld is for personal use. The government takes a sizable amount in the form of personal income taxes. After these taxes are paid, what is left with the individual is disposable income (Ogunbitan 2010). Disposable income is used to pay for consumer goods and services, to pay interest on debts and for savings. Disposable income is an cardinal concept because the income enables the consumer to decide how much to spend on online goods and services and how much to save.Savings is therefore that develop of disposable income that is not spend on current consumption of goods and services but reserved for future use. Economic growth on the former(a) hand is the process by which there is a sustained rise in real per capita income or output of goods and services over a given period of time (Ewa and Agu 2005). A positive affinity exists between savings rate and economic growth because when savings rate is high banks have more than capital to lend for capital investments to both private inves tors and the government (Tawiah 2006). When savings rate is increased, economic growth certainly will increase because more capital is available to investors at reduced interest pass judgment leading to increases investment in the capital stock. This study therefore focuses on exploring how savings rate impact economic growthTHE IMPACT OF SAVING valuate ON ECONOMIC GROWTHSavings implies refraining from consumption. A consumers disposable income is either consumed or saved. The rate at which different consumers consume and save kick downstairs of their disposable income apparently differs (Bleaney, Gemmell and Kneller 2001). This implies that different consumers have distinct average propensity to consume (APC) and average propensity to save (APS). These averages explain how much a consumer consumes and saves at a particular aim of income. Similarly, there is marginal propensity to consume (MPC) and marginal propensity to save (MPS). The marginal propensity to save represents the fractional part of an increase in income that is saved. Aggregate saving assembles idle funds from surplus units to deficit units in the economy facilitating investment both by the private and public sector (Ogunbitan 2010). When gather savings improves, financial institutions are in position of funds to borrow their customers and government alike. The rate of interest actually de shapeines investment in a country. The lower the interest rate charged by banks, the better investors are extracted to borrow for investment (Buscemi and Yallwe 2012).Income earned is either consumed or saved, that is, Y = C + S where Y represents income, C, consumption and S, savings. From the in a higher station linear function, saving mean(a)s income little consumption, that is, S = Y C. Savings therefore is affected by bustling spending decisions. There are basically three types of savings, namely personal saving, bloodline saving and government savingPersonal savings is influenced by the pu rsual factorsSize of income as income increases all things being equal, savings also increaseRate of interest a higher rate of interest may attract more people to save and vice versaGovernment policy the government can influence the level of savings in different ways such as attractive rate of interest policy and income tax relief or tax holidays or tax concessions (Ogunbitan 2010).Sense of responsibility people with sleepless spending habits save even when the income is low compared to extravagant people who dont even save at higher income levels.Political situation a country with a stable political climate encourages citizens as well as foreign investors to save and invest which government issues into economic growth.The second form is business saving and is affected by the followingProfits to encourage and affect savings, profit is necessary. The higher the profit the greater the inclination to save. Also, when profit is attractive directors of companies withhold aside part o f the profit to plough back into the business for growth and expansion (Bleaney, Gemmell and Kneller 2001).Anticipated rise in determines when business units anticipates rise in price level, they increase their quantum of savings with investment goods to reap later the anticipated rise in price (Tawiah 2006)Government policy an increase tax on comp alls profit will reduce tax and vice versaThe third form of savings is government saving. Government saving is achieved chiefly through a budget surplus. This may be secured by increasing revenue through additional taxation or by reducing current government expenditure. Apart from a budget surplus, saving can occur in other forms, such as when topic insurance and pension contributions exceed current payments (Tawiah 2006).Reasons for saving individuals may choose to save for some of the following reasonsTo provide for old age or for future expenditureTo guard against a wet day or unforeseen circumstancesTo leave an estate for immediat e children or grand childrenSometimes people save to become wealthy and push on their status in the society.Relationship between savings and investmentIn a frugal or savings economy, part of the earned income is consumed and part is saved. permits assume the followingThat household spend only part of their income and save the restThere are some firms which get out consumer goods and some which produce investment (that is, producer or capital goods), andThat all savings is undertaken by firmsIt is also important to explain withdrawals and injection. Savings and investment are examples of two other general categories of expenditure called withdrawals and injections respectively.An injection is an addition to the income of a domestic firm that does not gussy up from the spending of households or an addition to the income of domestic households that does not arise from the spending of the firms (Ewa and Agu 2005). A withdrawal on the other hand is any income that is not passed on in the circular flow of income and expenditure.Having established that part of center personal incomes (that is, the national income) will be spent on consumer goods and part will be saved, it then follows that National Income = meter spend on consumer goods + Amount saved, that is, symbolically,Y = C + S ..1S = Y C.2Where Y = IncomeC = Consumption andS = SavingsConsidering national income as the value of the garishness of the goods and services produced in which we have two parts, namely consumers goods (C) and producers goods (investment), the following equation could be deducedNational income = amount of consumer goods produced + amount of producer goods producedSince the production of investment good is an investment, the following equation could be obtainedY = C + I .1I = Y C .2We can now deduce that since equation 2 above is stated that Y C = S and where Y = income, C = Consumption and S = savingEquation 4 states that Y C = I. similarly Y = Income, C = consumption and I = Investment equations 2 and 4 gives the equality of saving and investment.Algebraically,Y C = S established from 2 above andY C = I recall, 4 above, then it implies thatS = I.1Since Y = C + S recall equation 1 above andY = C + I recall equation 3 above, that isC + S = C + I..2Hence, S = IFrom the above analysis, it can be concluded that the labyrinthine sense level of national income is determined when savings equals investment. It follows therefore that changes in either savings or investment will bring about changes in the national income. For instance, when savings exceeds investment income will fall but when investment exceeds savings, income will rise. This is because more saving but less investment will mean less employment of factors leading to lower total output and hence lower national income. On the contrary, more investment but less savings, will mean employment of more factors leading to greater total output and, hence, a higher national income. There is stability, th at is, balance or equilibrium in the level of national income only when saving is equal to investment.Economic growth implies more output per head as a result of more input and more efficiency. The output per head determines the standard of living in a country. Countries worldwide get preoccupied with horrendous efforts directed towards raising the rate of economic growth. This is the passion of the peoples in different countries to raise the level of their well-being. Economic growth is influenced by different factors which include the skills and efforts of the labor force, the rate of investment, and the type of investment which is induced by appropriate level of savings, technological progress, availability and extent of the exploitation of natural resources, the persisting climate in the trade relationship with other countries, the extent of specialization, tender and religious organization as in the qualities of the peoples character, government policy etc.ConclusionIt is est ablished from the above analysis the equality of aggregate savings to aggregate investment, and can be deduced that when savings rate is high in the economy, banks have more capital to lend for capital investment, which in stave promotes the volume of goods and services produced in the economy. That is, when savings rate increases, economic growth would certainly increase because more capital is available at reduced interest rate. This will also lead to increased investment in capital stock. It then implies that savings is a veritable tool that promotes investment in any given country. When investment is improved, there is increase in the volume of goods and services produced, stimulated by the savings rate which in turn leads to higher gross national income figures. This figures when measured leads to higher income per head and increased real income of the citizens.When government policies favor both households and firms who are the major agent of production, it leads to higher ra te of savings and higher rate of savings provides funds available to prospective investors who borrow from either the financial institutions or from the money market on short term basis and from the capital market on long term basis. The improvement in the level of economic activities continues with additional savings as a result of improvement in the various sectors of the economy and eventually economic development is attained which is the goal and pursuit of all economies. It is therefore not out of place to conclude that savings rate in an economy can boost economic growth. Government should always ensure that monetary policies like attractive rate of interest on savings, bank rate, liquidity ratio etc. and fiscal policies like tax rebate, tax concessions and tax holidays are favorable at all times for the firms and household who are the major agent of production process in the economy to continue to accumulate loanable funds by banks to accelerate investments. The rate of savin gs in an economy is a determinant of economic growth.Works CitedBleaney, M, N Gemmell, and R. Kneller. Testing the endogenous growth model public expenditure, taxation and growth over the long-run. Canadian Journal of Economics, 2001 36-57.Buscemi, Antonino, and Alem Hagos Yallwe. Fiscal Deficit, National Saving and Sustainability of Economic Growth in Emerging Economies A Dynamic GMM Panel Data Approach. multinational Journal of Economics and Financial Issues, 2012 126-140.Ewa, U, and G. A. Agu. New System Economics for Alevel. Africana First Publishers Limited, 2005 180-181.Ogunbitan, O. Easy to Understand Economics. Rasmed Publication Limited, 2010.Tawiah, P. Basic Economics for West Africa. Idodo Umeh Publishers Ltd., 2006.