...Relationship between the Savings Rate and Economic Growth of China By: Muhammad Saddam Hossain Institute of Business Administration, Jahangirnagar University Submitted to: Dr. Shuddhasattwa Rafiq Associate Professor, Institute of Business Administration, Jahangirnagar University Submitted by: Muhammad Saddam Hossain Batch: 21st Class ID: 1565 Date of Submission: June 11, 2013 Institute of Business Administration, Jahangirnagar University 1 Table of Contents: Contents 1. Introduction 2. Savings Rate 3. China’s High Savings Rates 4. How to calculate Savings Rate a. Private saving b. Public saving c. National Saving d. Savings Rate 5. China’s Comparative Savings Rate 6. Relationship between the saving rate and economic growth 7. Savings Rate Vs Economic Growth of China 8. Conclusion Page 3 3 3 4 4 4 4 4 5 6 7 9 Illustrations: Contents Figure 1: National Saving Rate by Region Figure 2: Relation Between savings rate and Growth Figure 3: Saving and Investment Rate of China Table 1: National Reserves by Countries Page 5 6 7 8 2 Introduction: A savings rate is refers to the percentage of Gross Domestic Product (GDP) savings by households in a country. It indicates the financial state and growth of the country, as household saving is the main source of government borrowing to fund public services. It varies among countries and is influenced by various factors such as retirement age, borrowing constraints, income distribution over lifetime...
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...Does Saving really matter for Growth in Developing Countries? The Case of a Small Open Economy Olajide S. Oladipo, PhD Department of Economics and Finance School of Business, Medgar Evers College 1637 Bedford Avenue, Brooklyn, NY 11225 Email: ooladipo@ mec.cuny.edu Abstract The study employed the Toda and Yamamoto (1995) and Dolado and Lutkepohl (1996) – TYDL- methodology to uncover the direction of causal relationship between savings and economic growth in Nigeria between 1970 and 2006. The empirical results suggest that savings and economic growth are positively cointegrated indicating a stable long run equilibrium relationship. Further, the findings revealed a unidirectional causality between savings and economic growth and the complementary role of FDI in growth. Keywords: Cointegration, FDI, Savings and Economic Growth JEL Classification: C32; E21;O11 Does Saving really matter for Growth in Developing Countries? The Case of a Small Open Economy Introduction The relationship between savings and economic growth has received increased attention in recent years especially in developed and emerging economies [see Bacha (1990), DeGregorio (1992), Levine and Renelt (1992), and Jappelli and Pagano (1994)]. This might not be unconnected to the central underpinning of Lewis’s (1955) traditional development theory that increasing savings would accelerate economic growth. Research efforts by Kaldor (1956) and Samuelson and Modigliani (1966) examined how different savings...
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...India’s growth rate since 2004 is the highest in the world. This is often referred to as India’s growth miracle. Before Eighties of the last century India’s average growth rate stuck around 3.6 per cent per annum which Late Prof. Raj Krishna called Hindu rate of growth. In the eighties India’s average rate of economic growth rose to 5.6 per cent per annum and further in the nineteenth and up till 2002-03 (i.e. in 12 years period). India’s average growth rate went up to 6.2% per annum under liberalisation and globalisation of the Indian economy. But since 2004 to FY 2007-08 India’s average annual growth rate of GDP rose above 9 per cent per annum. In 2008-09 while the advanced developed countries were experiencing recession (i.e. negative growth), India succeeded in achieving 6.7 per cent growth in 2008-09 which further rose to 8.4 per cent in 2009-10 and 2010-11. However, for the reasons explained later, estimated rate of growth of GDP in 2011-12 fell to 6.5 per cent and for 2012-13 also India’s growth rate is again estimated by Reserve Bank of India to be 6.5 per cent.Rate of Domestic Saving and Fixed Capital FormationNow the question is how do we account for such a high growth in GDP from 2004-05 to 2010-11. Growth depends mainly on rate of saving and investment (or, in other words, on rate of capital formation), and improvement in technology or capital output ratio. In India such as other emerging economies, China, Indonesia and South Korea, it is increase in rate of saving...
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...THE ECONOMY IN THE VERY LONG RUN: The Economics of Growth LEARNING OBJECTIVES After reading and studying this chapter, you should be able to: ̈ Understand that economic growth is due to growth in inputs, such as capital and labour, and to improvements in technology. ̈ Understand that capital accumulates through savings and investment. ̈ Understand that the long run level of output per person depends positively on the savings rate and negatively on the rate of population growth. ̈ Understand that the basic economic growth model predicts that standards of living in different countries will eventually converge. 61 62 PART 2 The Economy in the Long Run and the Very Long Run e have enormously higher incomes than did our great-grandparents. People in industrialized nations are far wealthier than people living in less developed countries. In fact, North Americans and many Europeans had higher incomes a century ago than people in poor countries do today. What accounts for these vast differences? What will determine our standard of living in the future? Growth accounting and growth theory answer these questions. Growth accounting explains what part of growth in total output is due to growth in different factors of production (capital, labour, etc.). Growth theory helps us understand how economic decisions control the accumulation of factors of production, for example, how the rate of saving today affects the stock of capital in the...
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...Gabriella Jackson "High saving promotes faster growth. So having more savers in the global economy should be good for our long run prosperity." Long-term economic growth is the expansion of the productive potential of an economy. Therefore, to ensure such growth, aggregate supply must continually shift outwards as shown in the diagram below. AS AS Price Level 1 2 P 1 P 2 AD Figure 1: Long-term economic growth 1 Real Gross Domestic Product Y Y 1 2 The diagram shows aggregate supply shifting outwards from AS to AS and consequently the price level falls from P to P and real gross domestic product rises from Y to Y . 1 1 1 2 2 2 Saving refers to the income of a household, firm or government that is not spent but set aside for future consumption or investment. It is vital to an economy because it provides finance for capital investment. Investment refers to the purchase of capital goods, which are used to aid further production, meaning the productive potential of the economy increases. Without such investment, aggregate supply and the productive potential of the economy would remain static. If this were to be accompanied by aggregate demand increasing at a fast pace, overheating in the economy would be the likely result. AS Price Level 1 P P 2 1 AD 1 Real Gross Domestic...
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...Endogenous growth theory addressed limitation associated with the neo classical growth model. To what extent is this assertion valid? Introduction Neo classical growth model is an approach in economics focusing on the determination of price, output and income distributions in markets through supply and demand. These is done through a hypothesized maximization of income- constrained utility by individuals and of cost constrained profits of firms employing available information and factors of production. This economic model was developed from the classical school of economics, which was dominant in the eighteenth and nineteenth centuries. It can be traced to the marginal revolution of the 1860’s, which came up with the concept of utility as a key factor in deterging value in contrast to the classical views that the costs involved in production were value’s determinant. The Neo classical approach became increasing mathematical, focusing on the perfect competition and equilibrium. Neo classical growth model considered two factors production function with capital and labour as determinants of output. Besides, it added exogenously determined factor, technology, to the production function. Neo classical growth model uses this production function: Y=AF (K, L)……….(1) Y= Gross Domestic Production (GDP) K= Stock of Capital L= Amount of unskilled labour A= Exogenously determined level of technology. *Note a change in this exogenously variable and technology...
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...Chapter 6 - The Source of Economic Growth - * An economy’s output of goods and services depends on the quantities of available inputs such as capital and labour and on the productivity of those inputs * Y = AF(K, N) * Either the quantity of input must grow or productivity must improve (or both) in order to have growth * Pg 182 – equation 6.2 * Growth accounting equation is the production function written in growth rate form Growth Accounting * Output growth can be divided into three parts: the resulting from productivity growth, increased capital inputs or increased labor inputs * Growth accounting measures empirically the relative importance of these three sources of output growth Growth Accounting and the Productivity Slowdown * One explanation for productivity slowdown is that there has not been a slowdown at all but rather is the result of a measurement error * Another explanation is that there was a slowdown due to the large increase in oil prices that occurred in 1970’s as a result of the actions of the OPEC oil cartel * Another explanation is that the productivity slowdown may have resulted from the onset of the revolution in information technology - Growth Dynamics: The Neoclassical Growth Model - * Growth accounting does not explain why capital and labor grow at the rates they do * The growth of capital stock is the result of the myriad saving and investment decisions of households and firms * This model is useful...
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...impact of real interest rate on national saving in five Association of Southeast Asian Nations (ASEAN) of Indonesia, Malaysia, the Philippines, Singapore and Thailand. We analyze impact real interest rate to nation saving for ASEAN starting 1991-2013. Through an analysis from Excel, real interest rate is found to have significant impact on national saving during different stage of economic. Extensions using a graph reveal the impact of real interest rate in ASEAN-5 and thus mainly reflect heightened concerns to national savings amid the Asian financial crisis and the global financial crisis. Keywords: real interest rate, national saving, financial crisis 1.0 Introduction The world’s average saving rate has been declining since the first oil shock and through the early 1990s. However this trend conceals a large and increasing dispersion of saving rates, particularly among developing countries. The large heterogeneity in saving behavior is associated to country and time differences in levels of development, growth performance, and fiscal and financial policies. The level of real interest rates has once again become the focus of policy makers' concerned. To understanding the response of national saving to changes in interest rates is central to many issues in economic policy. For example, a reduction in the budget deficit would probably cause interest rates to decline. If personal saving declined as a result, the overall increase in national saving would be less than the...
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...view that the key for US economic recovery is drastically lowering the number of unemployed Americans. Once more people will be employed, this is going to lift overall spending in the economy and consequently general economic activity will follow suit, so it is held. We suggest that unemployment is not the key issue for economic growth. What matters for individuals is not whether they are employed as such but the purchasing power of their earnings. The key for this is the infrastructure individuals utilize in the production of goods and services. What permits an increase of the production of goods and services and hence raises people’s living standards is an expansion and enhancement of infrastructure. What in turn permits this is an expanding pool of real savings. Contrary to popular thinking, the Fed’s and the government policies that are aiming at lowering unemployment don’t improve people’s living standards, but on the contrary they undermine the process of real wealth generation and thus set in motion an economic impoverishment. In fact the latest government data indicates that many more Americans have fallen below the poverty line in 2009 despite all the massive stimulus packages. For the time being, the latest US economic data remains subdued. Also in China a visible fall in the growth momentum of money supply M1 raises the likelihood of a visible fall ahead in economic activity indicators. Is a reduction in unemployment the key to US economic recovery? Most experts are...
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...Solow Model The Solow Model states that by looking at productivity, capital accumulation, population growth and technological progress we can explain how long run economic growth can be achieved. The Solow Model also makes a clear distinction that new capital is more valuable than old capital. This is because since capital is produced based on new technology and technology is improved within time, then new capital will be more productive than old capital. One of the most important things any economy would like to achieve is a steady state. A steady state is a situation in which the economy’s output per worker, consumption per worker, and capital stock per worker are constant (Abel & Bernanke & Croushore, 2012, pg. 216). The rate of growth of an economy as it emerges to a steady state is determined by the rate of capital accumulation. Capital accumulation is in turn determined by the saving rate. Of course the higher the saving rate the high the amount of capital accumulation. The higher a countries saving rate the faster it will grow, however this is true only in the short run. In the long run, the Solow Model states that it is technological innovation rather than capital accumulation that sustains the growth. In fact capital accumulation might hinder growth in the long run because of the marginal productivity of labor, which will decrease. Thus saving while desirable in the short run is not in the long run, unless it is accompanied with technological innovation...
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...Economic growth is sought after by every country because it promises to build and strengthen a country’s foundation in several ways. Primarily, it seeks to reduce poverty which means to improve the people’s access to basic amenities. Governments will be able to expend on public goods like healthcare, education and infrastructure because of the added tax revenues earned from higher income earners. This consequently leads to improved standards of living for all classes of people. Economic growth also injects investments into the economy as savings become capital for business ventures. It brings twin benefits by boosting productivity and raising income levels for those working in the industrial and service sectors. Thus, an increase in gross domestic product (GDP) is not the only determinant of economic development. It is directly correlated with human welfare factors. Hence, the economic growth models that we study examine the varying degrees of this correlation across different economies and highlight the underlying importance of savings. Out of the three emerging countries given, I have chosen Malaysia to discuss in my essay. Malaysia is a steadily developing economy that has been constantly growing since 2001 as can be seen from the chart below. And it has experienced a 7.2% real GDP growth rate in 2010, highest so far since the 8.6% growth in 2000. Chart 1: GDP Real Growth Rate Chart by Year (Source: http://www.indexmundi.com/g/g.aspx?c=my&v=66) As identified by the...
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...FACTORS THAT AFFECT THE GROSS DOMESTIC PRODUCT OF THE PHILIPPINES Table of Contents I. Introduction 1. Background of the Study 2. Statement of the problem 3. Objective of the study 4. Significance of the study 5. Scope and limitations II. Review of related literature 1. Unemployment Rate 2. Unemployment Rate and Gross Domestic Product Growth Rate 3. Savings 4. Savings and Gross Domestic Product Growth Rate 5. Inflation Rate 6. Inflation Rate and Gross Domestic Product Growth Rate III. Operational Framework 1. Presentation of Data 2. Description of Variables 3. A-‐priori Expectations 4. Model of the Study IV. Methodology V. Empirical Results and Interpretation 1. Summary of Data 2. Regression of the Model 3. New Model of the Study 4. Testing for Multicollinearity 5. Testing for Heteroscedasticity 6. Testing for...
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...Macro economic indicators of Bangladesh economy Introduction The Bangladesh economy has experienced both macro-economic stability and robust economic growth following the transition to a democratic rule in the early of 1990s. In the backdrop of the deep macro-economic crisis of the late 1980s, a series of stabilization measures were introduced in the Bangladesh economy which largely restored macro-economic stability in the early 1990s. Economic growth in Bangladesh averaged 6.3 percent during financial year (FY) 04-07. The economy has once again proved its resilience in achieving stronger than expected growth despite having to contend with the adverse effects of unfavorable weather conditions in financial year (FY) 04, the subsequent sharp price increase in oil and other essential imported commodities and periods of political unrest and uncertainty. Sustained gross domestic production (GDP) growth coupled with strong growth in exports and remittance has led to a marked improvement in the fiscal and balance of payments position and substantial improvements in the economic fundamentals necessary for macroeconomic stability. However, the rise in the inflation rate and further evidence of income inequality have tempered growth's direct impact on the quality of life. Macro Economic indicators In the past decade, Bangladesh enjoyed a positive growth rate in GDP and other macro economic indicators. As the most densely populated country in the world, Bangladesh is facing the...
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...BOFIT Discussion Papers 15 • 2011 John Knight and Wei Wang China's macroeconomic imbalances: Causes and consequences Bank of Finland, BOFIT Institute for Economies in Transition BOFIT Discussion Papers Editor-in-Chief Laura Solanko BOFIT Discussion Papers 15/2011 20.06.2011 John Knight and Wei Wang: China's macroeconomic imbalances: Causes and consequences ISBN 978-952-462-711-5 ISSN 1456-5889 (online) This paper can be downloaded without charge from http://www.bof.fi/bofit. Suomen Pankki Helsinki 2011 BOFIT- Institute for Economies in Transition Bank of Finland BOFIT Discussion Papers 15/ 2011 Contents Abstract ................................................................................................................................ iii Tiivistelmä ........................................................................................................................... iv 1. Introduction ....................................................................................................................... 1 2. China’s macroeconomic imbalances ................................................................................. 2 3. China’s external imbalance ............................................................................................. 14 4. Reviewing the export surplus .......................................................................................... 22 5. The external surplus and foreign exchange reserves .......
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...as a revolt against the school of classical economic thought. Neoclassical economics sought to explain the maximisation of utility with an underlying theory of rational choice theory. In the post war period a movement occurred that sought to synthesis the macroeconomic, long run theories of John Maynard Keynes with the microeconomic, short-run theories of neoclassical economics. This essay will explore how John Hick’s ISLM synthesis of Keynes is related to the neoclassical growth model. In addition it will explore how both the growth model and theory of capital reproduce problems inherent in the explanation of multi-sector economies. The Keynesian revolution, one of the “most significant events in twentieth century economic science,” disputed society’s adherence to classical laissez-faire economics (Yaroufakis, Halevi, & Theocarakis, 2011). The unsubstantiated ability of the self-clearing markets to maintain equilibrium was challenged during the early twentieth century by John Maynard Keynes in his text The General Theory. Yet as the depression strengthened and the global economic climate changed, a group of economists emerged that ceased to be either anti- or pro-Keynesian. Known as the Neo-Keynesians, they incorporated the macroeconomic framework of Keynes’ theory for understanding short run aggregate issues while the neoclassical model remained relevant for long term microeconomic analysis of growth. With the creation of economic tools, namely the ISLM Model that led to the...
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