National savings

What Is National Savings?

National savings represents the total amount of saving within an economy by households, businesses, and the government. It is a fundamental concept in macroeconomics and a critical component of a nation's financial health and capacity for future investment. National savings directly influences the availability of funds for capital formation, which is crucial for long-term economic growth. It is part of the broader financial category of national accounts, which track the economic activity of a country.

History and Origin

The concept of national savings, as an aggregate measure, gained prominence with the development of modern macroeconomics and national income accounting in the 20th century. Economists and policymakers began to rigorously measure and analyze national savings rates as they recognized the strong link between saving, capital formation, and economic prosperity. For instance, a 1991 National Bureau of Economic Research (NBER) paper highlights a decline in saving across the developed world in the decade prior, underscoring the serious consequences for individual economic security and societal ills like decreased industrial competitiveness and slower capital accumulation⁹. The International Monetary Fund (IMF) has also extensively analyzed the role of national saving in the world economy, documenting trends and their implications for both industrial and developing countries⁸.

Key Takeaways

• National savings is the sum of private savings (household and business) and public savings (government).
• It is a crucial determinant of a nation's capacity for domestic investment and long-term economic growth.
• Higher national savings rates generally facilitate greater capital accumulation.
• Policies aimed at influencing national savings often involve fiscal policy and tax incentives.

Formula and Calculation

National savings ((S_N)) is calculated as the sum of private savings ((S_P)) and public savings ((S_G)):

Where:

• (S_P) = Private Savings = (Household Income - Consumption - Taxes) + (Business Profits - Dividends)
• (S_G) = Public Savings = Government Revenue - Government Expenditure (also known as the budget surplus, or negative if a deficit)

Alternatively, national savings can be derived from the national income identity in a closed economy:

Where:

• (Y) = National Income (or Gross Domestic Product)
• (C) = Consumption
• (I) = Investment
• (G) = Government Expenditure

Rearranging to solve for savings ((S = Y - C - G)), and knowing that in equilibrium (S = I), we get:

This identity shows that in a closed economy, national savings must equal investment. In an open economy, this relationship is expanded to include the current account balance:

Where:

• (NX) = Net Exports (Exports - Imports), which is equivalent to the current account balance.

This formula highlights how national savings can finance either domestic investment or net foreign investment.

Interpreting the National Savings

National savings provides insight into a country's ability to fund its future growth and reduce reliance on foreign capital. A high national savings rate indicates that a nation is generating sufficient internal resources to finance its domestic investment needs, which can lead to sustainable economic expansion. Conversely, a low national savings rate may necessitate borrowing from international financial markets to finance domestic investment, potentially leading to increased public debt or current account deficits. The Federal Reserve Bank of St. Louis, through its FRED database, provides extensive data on national saving rates, including the personal saving rate, offering a detailed view of saving trends within the U.S. economy⁶, ⁷.

Hypothetical Example

Consider the hypothetical country of "Econoland." In a given year, Econoland's households save $500 billion, and its businesses retain $200 billion in earnings after all expenses and dividends. The government of Econoland runs a budget surplus of $100 billion.

To calculate Econoland's national savings:

• Private Savings = $500 billion (households) + $200 billion (businesses) = $700 billion
• Public Savings = $100 billion (government surplus)

Therefore, National Savings = Private Savings + Public Savings = $700 billion + $100 billion = $800 billion.

This $800 billion represents the total amount of funds available within Econoland to finance domestic investment or net foreign investment for that year. If Econoland wishes to build new factories, infrastructure, or expand its productive capacity, this pool of national savings is crucial.

Practical Applications

National savings is a key indicator for economists and policymakers assessing a country's long-term economic prospects.

• Economic Forecasting: High national savings can signal robust future economic growth due to increased capital formation. Conversely, persistently low savings may suggest a future slowdown or greater reliance on foreign capital.
• Fiscal and Monetary Policy: Governments and central banks monitor national savings when formulating fiscal policy and monetary policy. For example, policies to encourage saving, such as tax incentives or efforts to reduce budget deficits, aim to boost national savings. The Organisation for Economic Co-operation and Development (OECD) frequently analyzes national saving trends among its member countries and their implications for economic development⁴, ⁵.
• International Trade and Finance: National savings influences a country's current account balance. As noted by the Bank of England, external current accounts are equal to saving minus investment in an economy, and imbalances can arise from differing national savings behaviors, such as those observed in China and the US³.
• Investment Planning: Businesses and investors consider national savings rates as they reflect the availability of domestic capital for new ventures and expansion. Healthy national savings imply a deeper pool of funds for financial intermediation.

Limitations and Criticisms

While a vital metric, national savings has certain limitations and criticisms:

• Measurement Challenges: Accurately measuring all components of private and public savings can be complex, and different methodologies may yield varying results. The U.S. Bureau of Economic Analysis (BEA) provides detailed national income and product accounts (NIPA) data, which is foundational for these calculations².
• Quality of Investment: A high national savings rate does not automatically guarantee strong economic growth if the saved funds are not directed toward productive investment. Inefficient allocation of capital can undermine the benefits of high savings.
• Distributional Effects: The impact of national savings on income distribution can be complex. For example, some monetary policies can have distributional effects, potentially impacting different wealth levels differently.
• Demographic Factors: Population aging can influence national savings rates, as older populations may dissave more than younger, working populations save. This demographic shift can pose challenges for maintaining sufficient national savings for future needs¹.

National Savings vs. Personal Savings

National savings is often confused with personal savings, but they represent different levels of aggregation.

The key distinction is scope: national savings encompasses all forms of saving within an economy, whereas personal savings refers specifically to the saving behavior of individuals and households.

FAQs

Why is national savings important for a country's economy?

National savings is crucial because it provides the financial resources necessary for a country to fund domestic investment, such as building new factories, infrastructure, and technology. This capital formation is a primary driver of long-term economic growth, improved productivity, and higher living standards. Without sufficient national savings, a country may need to rely on foreign borrowing, which can lead to increased external debt and potential financial vulnerabilities.

What factors influence national savings?

Several factors influence national savings, including household saving behavior, corporate retained earnings, and government fiscal policy. Key drivers can include interest rates, demographic trends (such as an aging population), income levels, financial market development, and government budget deficits or surpluses. For example, tax incentives for saving can encourage households to increase their contributions, while government budget deficits reduce public saving.

How does national savings relate to investment?

In a closed economy, national savings is identically equal to domestic investment. This means all funds saved within the country are used to finance capital expenditures. In an open economy, national savings can be used for domestic investment or net foreign investment (i.e., acquiring foreign assets). Therefore, higher national savings allows for greater domestic investment without relying on foreign capital, or it can lead to a larger current account surplus, indicating a net outflow of capital.

Can a country have negative national savings?

Yes, a country can have negative national savings if its total consumption (private and government) exceeds its national income. This implies that the country is spending more than it produces, and it must finance this excess spending by borrowing from abroad, leading to a current account deficit. Persistent negative national savings can be unsustainable in the long run, as it increases a nation's foreign liabilities.