Savings and the Economy – Introduction

There are two key microeconomic decisions which mark the interface between the micro and the macroeconomy. One is the work/leisure decision which has an immediate impact on the level of economic activity. The other is the consumption/saving decision. This is one of the factors which determines income growth with other factors being the rate of total factor productivity growth and any trends in labour supply. Low-saving countries are likely to experience low income growth. They may nevertheless experience apparently satisfactory rates of GDP growth if domestic capital accumulation is financed from abroad. The scope for divergence between the two Ð which is substantial in countries like the Irish Republic - demonstrates how use of GDP growth as an indicator of economic performance can be misleading.