Hi, I’ve been reading that usually the amount borrowed and re-invested in the economy equals five times the amounts of savings (life insurance + personal bank accounts) in this given (developing) country.
Is that correct?
Please give sources with the answer
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For someone not initiated in economics, it is first better to recognize that the terms Saving and Investment has different connotations in different contexts. One must be careful in using these terms and coming to the conclusions.
In economics, Saving is that portion of income that is not consumed. Saving, Consumption and Income refer to a period, normally a year. Investment is nothing but the additions to Capital stock including inventories/stocks during a year.
At the national level therefore Saving is always equal to Investment in a closed economy. In an open economy, if domestic savings are greater than the domestic Investment, then the excess Savings are invested abroad. On the other hand, if the domestic Savings falls short of the domestic investment, it means foreigners contributed to the investment in this country to the extent of the shortfall in Saving. For understaning these concepts in detail please read Samueson’s Intriduction to conomics – relevant Chapter. Also, visit http://en.wikipedia.org/wiki/Saving_(eco…
and http://www2.hawaii.edu/~rpeterso/saving….
Now coming to your reference to borrowings for investment and life insurance and bank deposits etc.. please note that for proper understanding you must recognize that borrowings are an aggregate outstanding at a point time measure. So are the funds with life insurance and the bank deposits.Therefore they are kind of cumulative figures. and not flow figures of Annual Saving or annual Inmvestment.
Now to tally them, we must also know that banks and insurance companies are not the only sources of finance for buildinng up invstments. There are mutual funds, hedge funds, loan companies, pension funds, foreign commercial or govt. loans, World Bank loans and so on. So, you need not expect that the amount borrowed and re-invested in the economy equals the amounts of savings (life insurance + personal bank accounts). Moreover, in developing countries, the Govt. itself makes lot of capital expenditure (investment expenditure) through borrowings from the public, chaiatable instotutions, religious institutions, as well as thru’ deficit financing (simply printing money). So these indicators of something being 5 times of something may look surplrising but these do not have much meaning in the way you are thinking about it. For these kinds of analysis what is needed is the official statistics on the holdimg of financial assets and the distribution of financial claims. Unless you are a little advance in economics and accountancy, it would be difficult for me to explain without confusing you. So, I would rather suggest yo read a good text book on Macro economics AND National iNCOME ACCOUNTS.
For the economy as a whole, savings=investment.