Correlation Between Savings and Investments and Their Impact on Gdp in China, India and Pakistan Essay Example
INTRODUCTION
The saving rate of any country is an important indicator of economic development since the domestic saving rate is directly related with the investment rate and the lending capacity of the banking system. Saving and investment are two key macro variables with micro foundations, which play a significant role in economic growth. Global emerging economies are experiencing record savings at a time when the developed world has been witnessing a decline in gross domestic saving rates, having a positive impact on the investment
climate in these countries. Higher savings and investment rates eventually help in boosting GDP. This is another reason why GDP is growing faster in the emerging world than in the developed world.
The organization of the paper is as follows: the next section provides an in depth literature review covering the three variables; savings, investments and GDP. Section III discuss the methodology, data and result of our research. Concluding remarks are given in the final section.
LITERATURE REVIEW
Savings is defined by economists as that part of after tax income that is not spent, hence, it equals disposable income less consumption (McConnell-Brue, 7th edition). The close relationship between saving rate and economic growth is explained by many economic growth models. A large body of literature on economic growth tends to support the traditional Solow (1956) growth model and the “New Growth Models” of David Romer’s and others in which higher savings leads to higher growth.
The debate over the correlation between saving and investment has been initiated by the work of Feldstein and Horioka (1980). Savings are the main source of funds to finance capital investment, while the share of total GDP that is devoted to investment in fixed assets is an important indicator of future economic growth for an economy. According to Mckinnon (1973) and Shaw's (1973) argument it is stated that in a financially repressed economy, interest
The saving rate of any country is an important indicator of economic development since the domestic saving rate is directly related with the investment rate and the lending capacity of the banking system. Saving and investment are two key macro variables with micro foundations, which play a significant role in economic growth. Global emerging economies are experiencing record savings at a time when the developed world has been witnessing a decline in gross domestic saving rates, having a positive impact on the investment
climate in these countries. Higher savings and investment rates eventually help in boosting GDP. This is another reason why GDP is growing faster in the emerging world than in the developed world.
The organization of the paper is as follows: the next section provides an in depth literature review covering the three variables; savings, investments and GDP. Section III discuss the methodology, data and result of our research. Concluding remarks are given in the final section.
LITERATURE REVIEW
Savings is defined by economists as that part of after tax income that is not spent, hence, it equals disposable income less consumption (McConnell-Brue, 7th edition). The close relationship between saving rate and economic growth is explained by many economic growth models. A large body of literature on economic growth tends to support the traditional Solow (1956) growth model and the “New Growth Models” of David Romer’s and others in which higher savings leads to higher growth.
The debate over the correlation between saving and investment has been initiated by the work of Feldstein and Horioka (1980). Savings are the main source of funds to finance capital investment, while the share of total GDP that is devoted to investment in fixed assets is an important indicator of future economic growth for an economy. According to Mckinnon (1973) and Shaw's (1973) argument it is stated that in a financially repressed economy, interest