Correlation Between Savings and Investments and Their Impact on Gdp in China, India and Pakistan

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The saving rate of any country is an important indicator of economic development since the domestic saving rate is directly related with the investment rate and the lending capacity of the banking system. Saving and investment are two key macro variables with micro foundations, which play a significant role in economic growth. Global emerging economies are experiencing record savings at a time when the developed world has been witnessing a decline in gross domestic saving rates, having a positive impact on the investment

climate in these countries. Higher savings and investment rates eventually help in boosting GDP. This is another reason why GDP is growing faster in the emerging world than in the developed world.

The organization of the paper is as follows: the next section provides an in depth literature review covering the three variables; savings, investments and GDP. Section III discuss the methodology, data and result of our research. Concluding remarks are given in the final section.

Savings is defined by economists as that part of after tax income that is not spent, hence, it equals disposable income less consumption (McConnell-Brue, 7th edition). The close relationship between saving rate and economic growth is explained by many economic growth models. A large body of literature on economic growth tends to support the traditional Solow (1956) growth model and the “New Growth Models” of David Romer’s and others in which higher savings leads to higher growth.

The debate over the correlation between saving and investment has been initiated by the work of Feldstein and Horioka (1980). Savings are the main source of funds to finance capital investment, while the share of total GDP that is devoted to investment in fixed assets is an important indicator of future economic growth for an economy. According to Mckinnon (1973) and Shaw's (1973) argument it is stated that in a financially repressed economy, interest rate remains below its market clearing value thereby generating less than the optimal amount of savings and thus detracting from the pool available for investment which can lead to a decrease in the GDP of a country. Empirical studies suggest that increase in real interest rate provides an incentive to private household to save more, induce corporate sector to generate its own savings due to high cost of borrowing, thus overall saving would increase (Iqbal 1993). Further a higher rate of economic growth may also stimulate savings through what Mckinnon (1973) has termed as the ‘Portfolio-Effect’ of growth. Nasir, S., & Khalid, M. (2004) state in their paper that one unit growth rate increase in GDP would lead to almost half unit increase in savings rate, suggesting that people tend to save more out of transitory income which is consistent with results of Qureshi (1981). Remittances showed similar results of positively effecting savings rate. Evaluating the second variable, which is that of investment, it is again significant that the determinants of investment be fully comprehended as well. Provision of good infrastructure, creation of a favorable investment climate by adopting stable macroeconomic policies and by providing stability, secure property rights and good industrial relations have been important factors for raising rate of investment (World Bank 1993). Law and order situation, feasible and favorable investment opportunities and the economic credibility among the world economies leads to a positive impact on the total investment in a county. The role played by financial repression, keeping interest rates below market clearing levels, is, however, controversial. In this respect, Christy and Clendinon (1976) concluded saving rate and interest as important determinants. Analyzing the third variable, which is the GDP, it is established theoretically that the growth rate of GDP depends on the level of investment, addition to the labour force, HRD and...
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