Is the Increase in Private Savings Rate Helping Economic Growth?
The effective demand theory assumes that private investment determine private savings composed of retained earnings and the savings of households. For a given period private savings constitute a known value. Under these circumstances, in view of given total savings, households may only increase or decrease their total consumption. It follows then, when private savings are given, that GDP changes in a reciprocal proportion to the propensity toward consumption by households. Concurrently, the structure of private savings changes - together with the increase in GDP retained earnings grow at the expense of households' savings. Taking into account total supply and demand and, further, assuming the existence of idle productive capacities, we notice that households may influence the saving rate but they do not determine total private savings. In consequence we arrive at conclusions that are countering our intuition. They corroborate a hypothesis that frequently decrease in the savings rate accelerates, while its increase slows, economic growth.
CEJSH db identifier