National Savings

Definition

National savings refers to the total amount of savings generated within a country, which includes both private savings and public (government) savings. It represents the portion of national income that is not consumed and is instead set aside for investment or future use.

5 Must Know Facts For Your Next Test

1. National savings plays a crucial role in determining a country's ability to finance investment and economic growth.
2. High national savings can lead to lower interest rates, making it easier for businesses and individuals to borrow and invest.
3. An increase in government borrowing (lower public savings) can crowd out private investment by reducing the overall level of national savings.
4. The trade balance, which is the difference between a country's exports and imports, is influenced by national savings through its impact on interest rates and investment.
5. Policies that encourage private savings, such as tax incentives or retirement programs, can help boost national savings and support economic development.

Review Questions

• Explain how national savings can impact a country's trade balance.
  • National savings plays a crucial role in determining a country's trade balance. When national savings are high, it leads to lower interest rates, making it easier for businesses and individuals to borrow and invest. This increased investment can lead to higher productivity and competitiveness, which can improve a country's export performance and reduce its reliance on imports, resulting in a more favorable trade balance.
• Describe how government borrowing can affect private savings and investment.
  • When the government increases its borrowing, it reduces public savings (the government budget surplus). This reduction in public savings can crowd out private investment by reducing the overall level of national savings available for investment. As the government borrows more, it can lead to higher interest rates, making it more expensive for businesses and individuals to borrow and invest, potentially slowing down private investment and economic growth.
• Evaluate the role of national savings in supporting a country's economic development and growth.
  • High national savings are essential for a country's economic development and growth. National savings provide the necessary funds for investment in physical and human capital, which can increase productivity and competitiveness. This, in turn, can lead to higher economic growth, improved living standards, and a stronger international trade position. Policies that encourage private savings and maintain a healthy government budget surplus can help boost national savings and support long-term sustainable economic development.

Related terms

Private Savings: The amount of income that households and businesses choose to save rather than spend on consumption.

Public Savings: The difference between the government's tax revenues and its spending, also known as the government budget surplus.

Investment:

The purchase of capital goods, such as factories, machinery, and technology, that are used to produce other goods and services.