Why to do savings
In this world the resources are scarce, same goes for the people of this world. The people of this world have scarce resources with them. They have limited income or earning to spend. Normally people don’t spend all of their earnings. They do keep some amount with themselves as savings. This saving concept arrived just because we can never predict the future with 100% surety, so who knows that we may have to face difficult situations ahead and in those situations we might need extra money. So this saving is done to tackle with any rainy day which may arrive anytime. So it can be said that savings are that portion of disposable income that is not spent on consumption of goods and services. Talking about savings rate, it is the amount which a population saves from what they earn.
How to calculate savings rate
If you divide the amount that a population saves with their disposable income and then covert it in percentage, the outcome is the savings rate. The disposable income is the income after all taxes have been paid. Savings Rate are the amount that a population saves divided by its disposable income. It is expressed in percentage.
Relationship between Savings Rate and Economic Growth
We know that almost all the variables studied in economics are depended on many other variables and if you have to state a theory you have to keep the other variables constant in order to show the relationship between two or more variables. So if all the variables are held constant, economic growth can increase the savings rate. When an economy grows more money is being circulated and thus people earn more so the savings rate increases.
Savings Rate in different Economies
The behavior of going or not going for savings is inculcated inside us by the culture we live in. Asians do have a habit to save more due to several reasons. The people of countries which follow the extended family way of living tend to have a responsibility to save more. In these economies the elder person of the family has a lot of responsibly on his shoulders as he is the only one to earn bread for the whole family. He has the responsibility to take care of the old and he is also responsible for the upbringing of the young. These countries have a higher savings rate. One the other hand, economies which follow the nuclear family phenomenon doesn’t feel the responsibility and thus doesn’t save more. They only have to earn for themselves or in some cases for the spouse as well. So such countries have a lower savings rate. All over the world, the savings rate of under developed economies are very low because these people in these economies are living from hand to mouth. So whatever they earn they have to spend almost all of it to live. The countries having high inflation rates have low savings rate if all other variables are kept constant. Savings rate of a country is a dynamic variable.