What determines the level of saving in an economy

In economics, saving is the decision of consumers to save money instead of consuming goods and services. The propensity to save depends on several factors such as interest rates, consumer confidence and future expectations. The level of savings can have a large impact on the performance of an economy. Low savings rates may cause higher economic growth in the short term, but they lead to lower levels of investment, making future economic growth more difficult. These are the most important factors in determining the level of savings in an economy.

Access to Credit. If bank loans, mortgages, and credit are readily and cheaply available, consumers will be encouraged to borrow. For example, in the period 2002-2007, there was a period of easy credit when banks were willing to lend cheaply. However, the credit crisis of 2007-08 made banks reluctant to lend, especially for subprime loans. As banks withdraw the availability of credit, savings rates will rise

Interest rates. An increase in interest rates makes saving more attractive because of the interest that saving earns. The base rate is the main determinant of savings as base rates indirectly influence business savings rates. However, commercial banks can offer additional incentives to save by offering attractive deposit accounts. The level of real interest rates is also important. This is the level of interest rates minus inflation. If interest rates are lower than the rate of inflation, there is little incentive for people to save.

Confidence about future economic prospects. If people trust the future, they will be more willing to borrow money. However, if they fear losing their jobs, then they will start saving and reduce loans. Therefore, savings rates are often cyclical. Falling in times of economic growth and rising in times of recession.

Attitudes towards saving. Savings rates can vary from country to country quite significantly. This may reflect cultural changes about saving. For example, China has a relatively high savings rate and the US a relatively low savings rate. This reflects a difference in attitude between consumption and saving.

house prices. When home prices rise, consumers see an increase in home equity. This makes people more optimistic and willing to borrow money. Falling home prices create negative equity, making it that much harder for people to borrow.

In the short term, savings rates can change due to changes in interest rates and economic confidence. In the longer term, savings rates are determined by access to and availability of credit and savings accounts. Social and cultural attitudes toward debt and saving are also important.

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