Macroeconomics Case Study

The Economics of Savings

OR

Abstract:
In any economy, savings provide not only required capital for economic growth but also ensure further demand in the economy. Adam Smith said, ‘...at portion which he annually saves, as for the sake of the profit it is immediately employed as a capital, is consumed in the same manner...but by a different set of people’. But some economists argue that spending will create its own demand and therefore savings are not that important. In the last quarter of the 20th century, western countries, Anglo-Saxon nations in particular, have embraced this notion and encouraged their populace to spend more. By the turn of the 20th century, these nations were saddled with low saving rates, some even with negative, New Zealand, for example. And this has set some economists to rethink the savings philosophy.

Pedagogical Objectives:

• To understand and analyse the factors that affect savings rate and savings function
• To understand the determinants of investment rate and investment function
• To analyse the relationship between saving function and investment function, whether savings equal investment
• To analyse the importance of savings and investment for economic growth
• To debate whether decline in thrift (savings) in the recent times is an issue of concern or is it desirable for economic growth.

Keywords : National savings rate, Spending, Demand side, Supply side, National borrowings, Fiscal Policy Case Studies, Current account, National accounting, Household savings, Fiscal Policy Case Studies, Budget surplus or deficit, Public spending, Savings glut, Global money mobilisation, Circular flow of money

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