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Effect of Savings on GDP - Essay Example

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The essay "Effect of Savings on GDP" briefly explains the relationships between savings and GDP growth, production factor and savings ratios, and the effect of too many savings on economic growth. GDP is the total market value of all final goods and services produced in a country in a given financial year…
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Effect of Savings on GDP
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Download file to see previous pages Savings even though considered generally as a good habit, especially like the current periods like recession, many economic Gurus are of the view that too many savings can adversely affect economic growth. Savings and GDP growth have direct relationships.
Savings and GDP growth of a country: Income = Consumption + Savings.
The largest part of total spending is consumption (RELATIONSHIP BETWEEN GDP, CONSUMPTION, SAVINGS AND INVESTMENT, p.1).
GDP can be calculated using the formula Y = C + I + E + G, where Y = GDP, C = Consumer Spending, I = Investment made by industry, E = Excess of Exports over Imports, G = Government Spending (Calculating GDP).
From the above two equations, it is clear that when the savings increase, income will also increase and the increase in domestic income can result in an increase in GDP. Income is utilized in two ways: consumption and savings. If the consumption is less, savings will be increased whereas if the savings are less, consumption will go high if the economy is stable. On the other hand, if the economy is weak, people may not have enough resources and they will be forced to spend less and it is not necessary that savings may go up in this case because of less spending. In most cases, people forced to spent a major part of their income to consume goods. The public can't save much and spent less because of the increasing expenses and living standards.
From the graph given above and below it is clear that GDP has come down a lot because of the less personal expenditure. The 2008 global financial crisis has occurred at an unexpected time and many people lost their jobs and forced to cut down their personal expenditure. In fact, people cut down their expenditure to save money for the future. At the same time, this cutting down of expenditure has resulted in fewer demands for the goods and the fewer demands forced the manufacturers to produce less. ...Download file to see next pagesRead More
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