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Relationship Between The Savings Rate And Economic Growth Of China

1982 words - 8 pages

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

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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 ...view middle of the document...

A low or negative savings rate usually indicates excessive borrowing, spending, or both. On the other hand, a high savings rate may result in slower economic growth as persons and companies are saving instead of purchasing goods and services. In the United States, savings put aside by individual states to pay for services when revenues fall below expenditures. That is, when the state is required to spend money in excess of its tax and other revenue, it may use the rainy day fund to make up the difference. States put a certain percentage of their budget surpluses into their rainy day funds. Rainy day funds are especially important for states that have balanced budget amendments in place. Here I will discuss about the saving rate of Peoples’ Republic of China, its rapid growing saving rate, comparing with other countries.

China’s High Savings Rates:
Since the early 1980s China has witnessed a rapid increase in its national savings rate to one of the highest rates in the world. Unlike the socialist period when consumption was repressed in order to redirect resources to investment, most of these savings are voluntary. Following the sharp increase in income that followed Deng Xiaoping’s economic reforms, household savings rates in China began to rise rapidly. They have continued to rise to the point that the national savings rate in China is now the highest in the world. That savings would grow in a country emerging from poverty is not necessarily surprising, but the magnitude of the rise in China is not easy to reconcile with economic theory. Theory predicts that people smooth out consumption over time by saving when their incomes are high and dissaving when their incomes are low. The direct implication is that consumers with rising incomes should start spending more immediately so as to enjoy the benefits of future income growth. Clearly this is not happening in China.

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How to calculate Savings Rat:
To calculate national saving rate we need to identify the private saving and public saving.

Private saving:
Private saving is calculated as follows: Private saving = Y- T- C Where, Y = Out Put T = Tax ascribed by the state government C = Consumption made by the individuals

Public saving:
Public saving is calculated as follows: Public saving = T- G Here, T = Tax ascribed by the government (Tax is considered as Government’s revenue) G = Government Purchases

National Saving:
If we add private saving and public saving then we can get the annual national saving, So, national saving, S = (Y- T- C) - (T- G) = Y- C- G National saving is also termed as Investment of Government

Savings Rate:
The saving rate s determines the allocation of output between consumption and investment. Saving rate is calculated as, Saving rate, s = i/y Where, i = Government investment equal as national saving S y = Total Output or Total Income

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China’s Comparative Savings Rate:
China’s saving rate is higher than the average of other high-saving...

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