Sample Essay On Determinants Of Savings In An Economy
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Determinants of Savings in an Economy

There are different determinants of savings in an economy. They are some of the major factors that play a crucial role in shaping the economic scenario of a country. Similarly, the determinants are considered responsible for downfall or growth of the investment sector in a country. They include

Demographic factors

Over the past years, economists and researchers have been trying to establish whether there is a close relationship between a country’s dependency ratio and its savings. It has been found to be negative and almost weak in developed and developing countries. However, dependency rate has significant demographic impact on savings. Therefore, when the dependency ratio of a country is high, chances are high that household savings will be relatively low.

Economic growth

Economic growth is a determinant of savings in many economies across the globe. There is a very positive relationship between household savings and GDP growth of a country. There is an increase in savings with a positive GDP. This is because of good income that increases consumption rate. What’s more, with better earnings, members of the public can lead a better life and it enables them to explore many other ways of saving besides normal spending.

Interest rate

Interest rate is also a major determinant of savings in an economy. There is a relationship between interest rates and savings. An increase in interest rates in an economy often has a positive effect on savings. It increases savings both in developing and developed countries.

Research also shows that financial liberalization leads to easy access of credit. This is a factor that reduces borrowing constraints and increases interest rates. It is carried out for the sensitivity of savings.

Government budget deficit

With an increased or growing budget deficit in an economy, consumers get an opportunity to save more. This includes public and private savings in developed and developing countries. It is a situation that occurs because of reduced government spending as opposed to a situation where taxes are increased.

What’s more, with current high consumption and income expectations, consumers are in a position to adjust to economic changes. This helps to reduce government deficit thus increasing savings in an economy.

Financial liberalization

Financial liberalization also plays a crucial role in determining savings in an economy. Due to liberalization, the need for precautionary savings is greatly reduced as per liquidity savings. Even so, it has a positive effect on the rate of consumption but it reduces the rate of consumption.

Wealth effects

In many economies across the globe, significant capital gains especially in corporate equities leads to a decline in household savings. Therefore, capital gains matters a lot. For instance, a dollar gain in equity wealth reduces savings and household wealth.

Piercing the corporate veil

Piercing the corporate veil is additionally one of the factors that determines savings rate in an economy. This is common in situations where corporate and household savings are high. High corporate savings means that households can easily pierce the corporate veil thus affecting personal savings model negatively. Savings reduce when there is piercing of corporate veil.

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