Answer to Question #87613 in Macroeconomics for Rex

Question

how saving contributes to economic growth

Answer 1

Savings are incidental to accelerate the pace of growth of any nation. It is the savings by an economy that are channelized by the banking and financial institutions as investments to the producer sector of the economy. The investments thus are used to produce goods and services for further consumption and hence consumption as well as investment demand come into existence. As already proposed by Keynes, that a change in investment can cause a larger change in the output through multiplier, Savings are required to bring this change in the investment. Thus, the rate of savings also plays an important role. 

But two things are noteworthy here, firstly, the rate of savings or marginal propensity to save should not be too high as it will cause the shortage of aggregate demand and thus economics growth will be affected adversely in absence of adequate aggregate demand and secondly, even if there are adequate savings available with the economy, absence of proper financial and banking sector or their inefficient functioning will again cause hinderance in channelizing the savings into investment and thus  the economic growth of any country will again be adversely affected.