Domestic Saving Concept - Assignment Example

Answer the Questions Name: Institution: Date: Introduction Domestic saving can also be described as the difference between a household’s disposable income and the consumption that is incurred. Over a period of time the saving rates have been constant in most countries and in some others the saving rates have been fluctuating. However due to the massive recession that took place between 2007 and 2008 observation of the trend of the saving rates showed that they had stated reversing themselves. In the subsequent year the saving rates had increased in most of the countries which also became a guideline to show that these trend would continue even in the following year which is 2010. Many countries like recording and calculating the rate of domestic saving as it enables them to do research on the state of the countries expenditure and this information plays a vital role in making the budget of the country. The domestic saving rate is found by dividing the domestic savings by the domestic income which is disposable. The results may be interpreted differently once received since once one gets a negative rate of saving means that they are using more finances than they acquire. This in other hand shows that the debtors in this scenario will increase. The domestic saving rates can be calculated differently and some of this ways include the net or gross basis. However the net basis of calculating the domestic savings rate is the basis commonly used since it takes into account the depreciation. The domestic saving are very important part of the economy. This because they can either affect the country’s economy either positively or negatively according to how the situation is. The main problem that comes about in the calculation of domestic saving rates is the comparison process. This is where the rates are compared for different countries this problem is also brought about by the differences in countries pension schemes and tax systems among other things which may affect the income that is disposable in the households. There are also some very important factors which play a huge role in affecting the saving rates this are factors like age, overall wealth, cultural factors and many more. This factors make the calculation and comparison of different countries saving rates very difficult. The main importance that results from calculating the domestic saving rates is the fact that the country is able to monitor the consumption of income that is available. Question 1 The increase in domestic savings can have many effects on the current accounts. This is because when the domestic savings increase this mean that more funds will be available for growth. In a country therefore the current account will increase in funds. Higher levels of domestic savings also make it possible for a country to cover its overall debt internally instead of seeking assistance from outside sources which come with an interest when returning. There are countries like the US and the UK who have experienced a low debt level but at the same time have a decreased domestic saving rate. However countries like Japan have been able to cover their debts internally due to the domestic savings rate which has also led to a subsequent and significant reduction in the rate of domestic saving. The increase in domestic saving rates coupled with a low consumption level could cause a larger share of the future GDP growth which may need to be supplied by investments, the net exports and finally the government expenditure. Taking a country like Australia for instance it has been running a current account deficit which shows the presence of a high level of investments. Increase in the domestic saving caused a subsequent decrease in the impact of the mining boom on the current account deficit[Aus11]. Therefore since the CAD is the difference between the gross investments and the gross savings an increase in the savings means that the CAD will be negative. When the rate of domestic savings increases there will be a subsequent decrease in the interest rates since a higher saving rate means that there will be funds in the banks to offer loans therefore meaning that the rate of interest will be reduced to a significant extent. When there is no money to give as loans the interest rates are increased to limit the amount of people of businesses that go to ask for loans which is an internationally used method. Domestically an increase in the rate of saving means that the amount of disposable income will reduce. In the case of Australia for example the increase in domestic saving when looked from the rate of deposits point of view has made it possible for the banks to cover the disruptions in the short term wholesale funding markets. A higher domestic saving rate is also associated with a lower growth of household debt and this leads to a stabilization in the domestic income. This means that when the domestic saving is high there is a possibility of different shocks to the domestic income however due to the high savings the household is able to counteract any shocks easily without any problems whether it is unemployment or simply just reduced wages. This is also helpful since high savings mean lower debts therefore when finances are stressed there are no debts to think about. Question 2 Nowadays in the Australian economy it is the tax cuts and bank giveaways together with the military expenses that have brought about unemployment however in 2014 the cause could be viewed as the recession that was at the time hitting a lot of countries. This means that the deficits were therefore structural and not just cyclical. This meant that there would be a deficit even if a high employment level was attained. Therefore Mr. Joe Hockey’s idea would not be able to work due to the above notion. Efforts to reduce the deficit at the expense of some very important and necessary social functions and programs were unnecessary and would not have the expected outcome. In fact it is safe to say that much of the reduction in the deficit came as a result of the decline in the employment ratio. A better idea would have been to rely on the stronger economic growth in order to boost government revenue and thus reduce the budget deficit. While there was a risk that the reserve bank would cut the rates one more time in the first half of 2014, however in the second half the risk will higher interest rates leading to a normal economic growth. Mr. Hockey’s plan would not work since there was a forecast that said the economy was likely to grow at a lower trend. This would be accompanied by a large fall in the resources investments which arose due to the boost in higher resources exports and the household sectors response to the low interest rates. The deficit was expected to be at 29.8 billion between 2014 and 2015 which was 1.8% of the GDP. The other reason as to why the policy would not fit well was because of the increased expenditure by the government on military action and national security. This was therefore a policy that was doomed to fail from the very beginning. The deficit could not be reducedbecause Mr Hockey’s policy would hurt the people of Australia in that they would be badly affected. This is because to achieve this there would need to be some budget cuts that would be put in place. However at the moment the government was spending a lot of money on the military action and internal security which are both important sectors of the country therefore it would have been very hard to institute this budget cuts as they would harm some vital areas of the country. This was among the reasons as to why the policy be Hockey would prove to be difficult. Increase in employment would lead to an increase in the country’s GDP which would ensure that from the taxes the government would have enough money to use on its budget and therefore meaning that the deficit would be catered for. Therefore the policy by Mr. Hockey would have worked in the manner above as the more people there were that were given jobs this meant that the economy of the country would be boosted and there the problem of budget deficits would be dealt with however there were some disadvantages to this plan. This disadvantages made this policy not to seem suitable and not to be applicable in the 2014 budget strategies that could help reduce the deficit the country was experiencing. Question 3 Australia undertook the monetary and fiscal policy to deal with 2008 global financial crisis. The central bank instituted this policy since it deals with the money supply in the country. This policy affects the interest rates. It is a policy that is maintained through actions such as increasing the interest rate or changing the amount of money that other banks are allowed to keep in their vaults or reserves. The interest are set on overnight loans in the market which in turn influences other rates in the whole economy such as lenders borrowers and economic activities. This subsequently has an effect on the rate of inflation. The fiscal policy is largely based on the ideas of John Maynard a British economist who had the notion that the government was able to change the economic performance through some adjustments to the tax rates and the government expenditure. Through this policy the government attempts to improve the unemployment rates and control inflation among others. Therefore this policy involves government spending policies that influence macroeconomic conditions. The criticism that came from using fiscal policy was that it would cause side effects on public spending. This is due to the fact that when used it could cause a decreased inflationary pressure which could affect the public services leading o market failure. Another issues was the budget deficit which would come as a result of this policy. High budget deficit would be sure to cause higher taxes and hence lead to crowding out. Crowding out is whereby the increased government expenditure causes a subsequent decrease in the private sector. This policy may also tamper with the consumer confidence hence even when the taxes would be lowered the rate of consumer spending would not increase. References Aus11: , (Australian Government, 2011), Read More