Posted in Finance, Accounting and Economics Terms, Total Reads: 512
Definition: National Savings Rate
National savings rate means the percentage of GDP of a country that is not spent by households, governments and businesses; instead it is saved or invested. Money can be used only for two things- Spending or Saving. Savings Rate refers to the money not spent but saved or invested. To understand it more intuitively, it can also include things related with savings: IRA contributions, contribution to retirement plans, mutual fund deposits, and savings accounts etc.
A simplified economic model helps us to understand the flow of GDP; it consists of 3 uses of GDP i.e Gross Domestic Product (the goods and services it produces in a year).
Y is national income (GDP) and its three uses are:
• C -consumption,
• I- investment
• G -government purchases
Hence: Y = C + I + G
In this model anything which is not spent is considered to be invested. National savings is understood as the amount of remaining money that is not consumed, or spent by government. In this simplified version of the economic model of a closed economy, anything that is not spent is assumed to be invested:
Hence NATIONAL SAVINGS = Y - C - G = I
• An increase in National Savings Rate indicate that the country is developing and a growing while a decline indicates that the people are consuming more than they are saving.
• In the United States, the national savings rate saw a drastic decline in 1990s, and this led to a string of foreclosures and increase in government support programs during the Great depression
• Low national savings rate also highlight increasing dependence on foreign capital.