Savings even though considered generally as a good habit especially like the current periods like recession, many economic Gurus are of the view that too much savings can adversely affect the economic growth. Savings and GDP growth have direct relationships. This paper briefly explains the relationships between savings and GDP growth, production factor and savings ratios and the effect of too much savings on economic growth.
GDP can be calculated using the formula Y = C + I + E + G where Y = GDP, C = Consumer Spending, I = Investment made by industry, E = Excess of Exports over Imports, G = Government Spending (Calculating GDP).
From the above two equations, it is clear that when the savings increases, income will also increase and the increase in domestic income can result in increase in GDP. Income is utilized in two ways; consumption and savings. If the consumption is less, savings will be increased whereas if the savings are less, consumption will go high if the economy is stable. On the other hand, if the economy is weak people may not have enough resources and they will be forced to spend less and it is not necessary that savings may go up in this case because of less spending. In most of the cases, people forced to spent major part of their income to consume goods. It is impossible for the public to save much and spent less because of the increasing expenses and living standards.
From the graph given above and below it is clear that GDP has come down a lot because of the less personal expenditure. The 2008 global financial crisis has occurred at an unexpected time and many people lost their jobs and forced to cut down their personal expenditure. In fact people cut down their expenditure to save money for the future. At the same time this cutting down of expenditure has resulted in fewer demands for the goods and the fewer demands forced the manufacturers to produce less. In short, the domestic production has come down a lot because of recession and