Savings, in broad sense, denotes the gap between income and expenditure/consumption. This money is usually kept in banks or used for investment through which the saver earns an interest income or investment returns. It is necessary for an individual or an economy to meet any unforeseen expense.
Interest rate is the primary component in the concept of savings. Interest rate is defined as the opportunity cost of holding money in hands, i.e., the amount foregone for keeping the money in hand. It is the incentive that propels any person to deposit money in banks.
There is a great deal of controversy regarding the effectiveness of interest rate on savings and investment. Classical economists believe that interest rates largely determine the volume of savings-investment for an economy.
On the other hand, Keynesian economists advocate the dependency of savings rate and investment on money supply-demand mechanisms.
Some Useful Concepts on Savings:
Savings is an important component of economic activity. The savings rate can bolster as well as deter economic growth.
On an individual level, savings is calculated by a person’s (or family’s) income less their consumption and tax paid. This is known as personal savings. Personal savings may be a result of binding contracts like pension schemes or any investment. Or, it may be an outcome of negative expectation about future income.
On a macro level, aggregate savings of any economy is a much more complex calculation. The savings by a country is known as national savings. It is the summation of personal, business and state savings.
SAVING Vs SAVINGS:
There is a significant difference between the terms “saving” and “savings”. While the former implies addition to the value of any asset, the latter represents a part of a particular asset. Hence, “saving” is a flow concept and “savings”, a stock concept.
SAVINGS AND INVESTMENT:
Savings is often equated with investment for any economy. The savings from households, companies as well as government are transferred to those who require it for investment purposes via financial intermediaries like, banks and other financial institutions. Such investments generally contribute to economic growth by adding to the capital base of the nation.
SAVINGS AND ECONOMIC GROWTH:
Level of savings for an economy may considerably differ from investment. If the savings is less than investment, it leads to excess aggregate demand and hence economic boom, in the short run. On the contrary, if this gap persists, in the long run, shortage of savings results in declining investment. Ultimately the economy gets stuck in a state of “bad” equilibrium.
Last Updated on : 3rd August 2013