Impact of Saving Rate on Economic Growth

Impact of Saving yard on sparing GrowthNURU ABUBAKARINTRODUCTIONSaving enjoin is the amount of money, express as a percentage or ratio which one deducts from his/her expendable ain income to set aside for retirement or for dowerment in the money or the with child(p) market in instruments like bonds treasury bills, sh ars and so forth Savings invest notify also refers to the percentage of rank internal product (GDP) that is come throughd by households in a uncouth (Ewa and Agu 2005). This indicates the financial state and offshoot of the country because households thrifts constitute the major source of organisation borrowing to finance public projects and also provides cash in hand for private coronation fundss. It is an obvious fact that income is received as wages or salaries, rents, concerns or realizes by owners of factors of production. With the received income households buy the finishr goods they need. Not all in all ain income functional to the i ndividual or family, or the household is for personal use. The government takes a sizable amount in the form of personal income taxationes. After these taxes are paid, what is left with the individual is fluid income (Ogunbitan 2010). Disposable income is employ to pay for involver goods and ser unrighteousnesss, to pay interest on debts and for deliverys. Disposable income is an important design because the income enables the consumer to decide how untold to spend on current goods and services and how much to execute.Savings is on that pointfore that resolve of disposable income that is not spend on current inlet of goods and services but reserved for approaching use. Economic ontogenesis on the otherwise hand is the process by which there is a sustained pass over in real per capita income or out distort of goods and services over a given period of time (Ewa and Agu 2005). A positive relationship exists between nest egg rate and scotch suppuration because when n est egg rate is high banks have more(prenominal) capital to give for capital investments to both private investors and the government (Tawiah 2006). When savings rate is ontogenesisd, economic developing certainly will increase because more capital is available to investors at decrease interest rates leading to increases investment in the capital stock. This study therefore focuses on exploring how savings rate push economic growthTHE IMPACT OF SAVING RATE ON economical GROWTHSavings implies refraining from consumption. A consumers disposable income is either consumed or saved. The rate at which different consumers consume and save part 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 take of income. Similarly, there is marginal propensity to consume (MPC) and marginal propensity to save (MPS). The marginal propensity to save represents the divisional part of an increase in income that is saved. Aggregate saving assembles idle bills from surplus units to deficit units in the economy facilitating investment both by the private and public sector (Ogunbitan 2010). When aggregate savings improves, financial institutions are in position of funds to borrow their customers and government alike. The rate of interest actually determines investment in a country. The lower the interest rate charged by banks, the better investors are soak uped to borrow for investment (Buscemi and Yallwe 2012).Income take in is either consumed or saved, that is, Y = C + S where Y represents income, C, consumption and S, savings. From the higher up linear function, saving reckons income less consumption, that is, S = Y C. Savings therefore is affected by active spending decisions. on that point are basically three types of savings, namely personal saving, business saving and government savingPersonal savings is influenced by the spare-time activity factors size of income as income increases all things being equal, savings also increaseRate of interest a higher(prenominal) rate of interest may attract more people to save and vice versaGovernment policy the government can influence the take aim of savings in different shipway such as attractive rate of interest policy and income tax relief or tax holidays or tax concessions (Ogunbitan 2010).Sense of right people with careful spending habits save even when the income is low compared to degenerate people who dont even save at higher income levels.Political situation a country with a stable semipolitical climate encourages citizens as well as foreign investors to save and invest which results 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 keep aside part of the profit to plough back into the business for growth and expansion (Bleaney, Gemmell and Kneller 2001). judge rise in prices when business units anticipates rise in price level, they increase their quantum of savings through investment goods to reap later the anticipated rise in price (Tawiah 2006)Government policy an increase tax on companys 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 increase revenue through additional taxation or by minify current government expenditure. Apart from a budget surplus, saving can occur in other forms, such as when internal redress 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 rainy day or unlooked-for circumstancesTo leave an estate for immediate children or grand childrensometimes people save to become wealthy and raise 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. Lets assume the followingThat household spend only part of their income and save the restThere are some firms which do 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 ii other general categories of expenditure called withdrawals and injections respectively.An injection is an addition to the income of a domestic help firm that does not arise from the spending of households or an addition to the income of domestic households that does not arise from the spending of the fir ms (Ewa and Agu 2005). A withdrawal on the other hand is any income that is not passed on in the circular catamenia of income and expenditure.Having established that part of aggregate personal incomes (that is, the national income) will be spent on consumer goods and part will be saved, it then follows that guinea pig Income = Amount spend on consumer goods + Amount saved, that is, symbolically,Y = C + S ..1S = Y C.2Where Y = IncomeC = outlay andS = SavingsConsidering national income as the value of the volume 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 deduced subject field 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 = Con sumption and S = savingEquation 4 states that Y C = I. alike 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 equilibrium level of national income is dogged 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 study 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, that is, balance or equilibrium in the level of national income only when saving is equal to investment.Economic growth implies more output per spot 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 airlift the rate of economic growth. This is the desire 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, expert progress, availability and extent of the exploitation of natural resources, the persisting climate in the trade relationship with other countries, the extent of specialization, social and religious organization as in the qu alities of the peoples character, government policy etc.ConclusionIt is established 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 turn 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 househol ds and firms who are the major factor of production, it leads to higher rate 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 emolument 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 come through which is the goal and pursuit of all economies. It is therefore not out of stain to conclude that savings rate in an economy can set ahead 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 gold at all times for the firms and household who are the major agent of production process in the economy to continue t o accumulate loanable funds by banks to accelerate investments. The rate of savings 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 economic science, 2001 36-57.Buscemi, Antonino, and Alem Hagos Yallwe. Fiscal Deficit, National Saving and Sustainability of Economic Growth in rising Economies A Dynamic GMM Panel Data Approach. International 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. soft to Understand Economics. Rasmed Publication Limited, 2010.Tawiah, P. Basic Economics for West Africa. Idodo Umeh Publishers Ltd., 2006.