3. How do household savings benefit the economy? Explain. What measures can be taken to promote savings? Discuss. (15 Marks)
घरेलू बचत से अर्थव्यवस्था को कैसे लाभ होता है? समझाएं। बचत को बढ़ावा देने के लिए क्या उपाय किए जा सकते हैं? चर्चा करें।
Candidates need to critically comment about how do household savings benefit the economy. The candidate needs to mention the measures that can be taken to promote savings.
In economics, household savings refer to money left after the household pays taxes and spends on the consumption of goods and services. It is vital for the economy’s long-term growth as it is the primary source of domestic loanable funds, besides savings from business and public sectors.
How do household savings benefit the economy?
- Household savings are a supply source of domestic funds for capital investment. Households save their money into various types of assets, such as deposits, stocks, and bonds.
- An increase in household consumption drives up aggregate demand stimulates a growing real GDP. Savings also become a pillow when times are hard.
- In return, they receive interest income, dividends, or capital gains. On the other side, to increase production, the companies require money to purchase new equipment and other capital assets.
- They then raise funds, for instance, by issuing bonds. Supply-demand of the money takes place in the financial market.
- By saving, households sacrifice current consumption for future consumption.
- For this reason, saving allows households to support their well-being.
- As the household invests in the corporate bonds, money flowing to the business sector.
- Now, with money, companies can invest and increase their productive capacity.
- Investment in capital assets is essential for economic growth.
- It is a key driver in increasing the productive capacity of the economy. Higher production capacity leads the economy to produce more goods and services, without causing inflationary pressures.
- In the capital markets, the money moves from household sectors to the business sector, for instance, through investing it into corporate debts or stocks. Companies can use it to funds capital investment. For this reason, household savings are essential to increase the productive capacity of business sectors.
- Savings also allow households to accumulate wealth. In addition to income, wealth is a crucial determinant for consumption.
Measures That Can Be Taken to Promote Savings
- Minimizing Fixed Expenses: Many people get locked into their lifestyle due to long-term contracts and debt. The more of this you can avoid and eliminate, the easier it is to change your budget each month in response to changes in income.
- Track Your Savings Rate: everyone should calculate it at least once a year. The mere act of doing so will subconsciously cause you to increase it.
- Watch the Credit Cards: You may be amazed at how much less you spend when you have to hand over cold, hard cash, not to mention take the time to go get it. This effect is likely higher than any 1-5% rewards you may be getting back for using the card.
- Minimize Taxes by Maximizing Tax-Deferred Retirement Accounts: One of the best ways to increase that savings rate is to use tax-deferred retirement accounts
The savings rate shows how much households save their income rather than being consumed for goods and services. Hence On both personal and a national-level, maintaining a solid household savings rate is one of the best cures for economic woes.