What Determines Level Of Saving In An Economy
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In economics saving is the decision by consumers to put aside money rather
than consume goods and services. The propensity to save depends on various
factors such as interest rates, consumer confidence and expectations of the
future. The level of saving can have a big impact on the performance of an
economy. Low saving rates can cause higher economic growth in the short term,
but lead to lower levels of investment making future economic growth more
difficult. These are the most important factors for determining the level of
savings in an economy.
Access to Credit. If bank loans, mortgages and credit is easily and
cheaply available then it will encourage consumers to borrow. For example, in
the period 2002-2007, there was a period of easy credit were banks were keen to
lend at a low cost. However, the credit crisis of 2007-08, made banks reluctant
to lend, this was especially the case for subprime lending. As banks withdraw
the availability of credit, saving ratios will increase
Interest rates. A rise in interest rates makes saving more attractive
because of the interest earned from savings. The base rate is the main
determinant of saving as base rates indirectly influence the commercial savings
rates. However, commercial banks may offer additional incentives for saving by
offering attractive deposit accounts. Also important is the level of real
interest rates. This is the level of interest rates minus inflation. If interest
rates are lower than the inflation rate then there is little incentive for
people to save.
Confidence about Future economic prospects. If people are confident
about the future, they will be more willing to borrow money. However, if they
fear being made unemployed then they will start saving and cut back on
borrowing. Therefore saving ratios are often cyclical. Falling in times of
economic growth and rising in times of recession.
Attitudes to Saving. Saving ratios can vary from one country to
another quite significantly. This can reflect cultural changes about saving. For
example, China has a relatively high savings ratio and the US a relatively low
savings rate. This reflects a difference in attitude between consumption and
saving.
House Prices. When house prices are rising consumers see a rise in
housing equity. This causes people to be more optimistic and willing to borrow
money. Falling house prices create negative equity so it is much harder for
people to borrow.
In the short term, savings ratios can change because of changes in interest
rates and economic confidence. In the longer term saving ratios are determined
by the access and availability of credit and savings accounts. Also social and
cultural attitudes to debt and saving are important.
About the Author
Richard Pettinger studied Politics and Economics at Lady Margaret Hall,
Oxford University. He now works as an economics teacher in Oxford. He enjoys
writing essays on Economic and he edits an Economics Blog focused on UK and US
economies:
http://www.economicshelp.org/econ.html
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Article Published/Sorted/Amended on Scopulus 2008-06-10 11:06:03 in Economic Articles
