What it means
Saving is the part of income left over after spending. At national level, economists add up saving by households, by companies that retain profits and by the government when it runs a surplus.
The total is called gross national saving, and dividing it by GDP gives the national savings rate. Why does it matter?
Investment in factories, equipment and housing has to be paid for either from domestic saving or by borrowing from abroad. A country with a high savings rate can fund more of its own investment, while a country with a low rate often relies on foreign capital and runs a current account deficit.
Rates vary widely between countries. Differences reflect culture, age structure, pension systems, tax rules, interest rates and how well people trust banks.
A young, fast-growing economy may save a large share of income to build up capital, while an ageing economy may save less as retirees draw down their savings. The national rate is different from the household or personal savings rate, which measures only what households put aside from their disposable income.
A government running large deficits can pull down the national rate even if households are saving a lot. For business, the national savings rate affects the cost and availability of finance.
Higher saving tends to lower interest rates and improve access to credit, while low saving can mean a reliance on foreign lenders and more exposure to shifts in global capital markets. The link to investment is captured in a simple identity.
Domestic investment equals national saving plus net borrowing from abroad, so a country that invests more than it saves must run a current account deficit. This is why policy makers often watch the savings rate when they worry about large trade imbalances.
In practice
Real-world examples.
Example
An economist compares two countries and finds that one saves 30% of its income and the other 15%. She explains that the first can fund much more investment at home, while the second depends on foreign borrowing. She warns the board that the second country is more exposed to a sudden withdrawal of foreign funds.
Example
A property developer watches national savings trends before launching a large housing project. A falling savings rate suggests that buyers will have less cash for deposits, so he plans smaller starter homes. He also arranges a partnership with a lender that offers low-deposit mortgages.
Example
A government finance official sees that the national savings rate has fallen because of larger budget deficits. She proposes a plan to cut the deficit so that public saving contributes again. The plan phases in spending cuts and tax changes over four years to avoid shocking the economy.
Formula
Calculation
National saving = National income - Consumption - Government spending
National savings rate = National saving / National income x 100
Suppose a country has national income of $2,000 billion, household consumption of $1,300 billion and government spending of $250 billion. National saving is $2,000 billion - $1,300 billion - $250 billion = $450 billion.
The national savings rate is $450 billion / $2,000 billion x 100 = 22.5%. If consumption rose to $1,400 billion, saving would fall to $350 billion and the rate would fall to $350 billion / $2,000 billion x 100 = 17.5%.Case study
Seen in the real world.
Marenta is an illustrative, fictional country where the national savings rate fell from 24% to 16% over a decade. Domestic banks found it harder to fund business loans, and borrowing costs for local firms rose.
A finance ministry study showed that household saving had barely changed, but the government had shifted from a surplus to a sustained deficit. The ministry set a plan to bring the budget back towards balance and encouraged long-term savings accounts for workers.
In this illustrative story the savings rate recovered to 20% over six years. Interest rates paid by local businesses fell by about two percentage points, showing how national saving connects to the cost of capital.
Watch out
Common mistakes.
- Confusing the national savings rate with the household savings rate, when it includes business and government saving.
- Assuming a higher rate is always better, when excessive saving can mean weak demand and slow growth in consumer industries.
- Ignoring that government deficits reduce national saving, even when households and businesses are saving steadily.
Questions
People also ask.
What counts as national saving?
The saving of households, businesses and government combined. Government saving is positive when it runs a surplus and negative when it runs a deficit.
How does it relate to investment?
Investment is funded by domestic saving plus borrowing from abroad, so the gap shows up in the current account.
Why do rates differ between countries?
Differences come from age structure, culture, pension systems, tax policy and trust in financial institutions.
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