Have you ever wondered how savings affect the economy? – ‘Savings’ is an interesting topic in economics. To us, it is something that we look towards when the economy of the country go through tough times.
‘Savings’ is defined as – “The income not spent.”
It is the difference between total income and total expenditures. The money that left aside after all spending and put aside for future use. The way people manage their expenditures and savings affects the overall Gross Domestic Product (GDP) or the economy of a country. The consumer spending accounts for 63% of GDP – rest areas are government spending, investment, and exports. So, it is the consumer spending that makes most of the GDP. That is why; it is the major determinant of the economic activity.
Here, in this article, we will have a closer look at the concept of savings and how it affects the overall economy of a country.
How Saving Money Affects the Economy?
Generally, people take it granted that the ‘savings’ are ‘cash savings’ that we buried under our mattress, backyard or put it in our savings bank account. When we deposit money in our savings bank account, doesn’t just hold. Banks usually use it to lend various things like –
- Personal Loan
- Credit Cards
- Car Loan
- And other debts.
Now the question is how saving money does affect the economy?
As per the Paradox of Thrift, the increase in the autonomous savings leads to a decrease in aggregate demand thus decrease in gross output. This led to an argument that savings are beneficial for an individual but harmful for the general population.
In simple words, your spending is someone else’s income. To better understand this, assume you spend Rs. 5000 on eating in a restaurant in a month, and suddenly you stop… well, the restaurant that was receiving Rs. 5000 on a monthly basis from an individual will have stopped receiving.
It is just for an individual. But, if you think of it as a large group of people, then you the difference will be huge. Multiply this by millions and the economy may fall apart, in short – economic slowdown.
So, as per paradox, when you start saving more, then the total revenues generated by companies will decline, which will decrease in demand, giving employers and employers lower income. Eventually, the total saving will also decrease because of lower-income and a weaker economy.
However, if the savings continue to decline, it may pose a challenge to the GDP growth and macroeconomic stability. It is because more people save, more they will likely to invest. But, as long as people hold their money in the bank accounts or under their backyard then it will not benefit the economy. A rapid rise in the savings does not guarantee the equivalent rise in investment. Although banks will see a rise in deposit, that will help companies with the lending.
There are other forms of savings that the people need to consider such as investing in the stock market, mutual funds, debts, and other investment options. It will not affect the economy much and the people can have enough invested to use it to compensate if they lose their jobs or having a difficult time in the future.
However, to do so, the government has to make financial markets that households can trust so that their savings can move from physical to financial assets which not only help generate better returns but also be healthy for country’s economy.
Hope, this article helped you in understanding the effect of savings on the economy. Nevertheless, if you have any query or would like to add something then don’t forget to mention in the comment section below.