Day 33 The saving habit

The saving habit

The patterns between Australian and Chinese to allocate their income on spending and saving are distinctly different. In China, there are many families save up-to 40% of their disposable income. On the other hand, in Australia, you can always find the uncollected bank receipt on the ATM shows the account remains 10 dollars balance. According to the statistic, Australian saves around 10% of their disposable income. Why the two countries’ citizens have such diverse saving behavior? And what is the cost and benefit behind this?

The saving is the remaining amount after the disposable income less spending. We will focus on household savings, which are part of private savings. Holding the real interest rate in China and Australia to be the same( results from the capital inflow/outflow of open economy), citizens in both countries are assumed to have equal incentives derived from the interest return. As we know, other incentives for savings are: life-cycle demands, precautionary deposits, and be quest savings. Personally, I believe the difference between Australian and Chinese saving trends are affected by the first two reasons. Unlike Australia, China suffered through WWII and civil war for many years, thus the political and social environment was unstable. In Chinese's tradition, people tend to save more in order to against unexpected fluctuates in life. Although the situation has improved since 1980s, people still retain that habit. In contrast, Australian society has a strong social welfare guarantee system, therefore the uncertainties in life are reduced into the minimum level. Furthermore, the prosper financial system allows Australian to have easier access to borrow for their lives-cycle events, such as student loan, house mortgages and car loans. That also reduce the incentive for Australian to save. Another effect that may result the saving diversity is the demonstration effect. Since most of the Chinese families choose to save, the social influence will lead individuals to make a deposit as well. Similarly, in Australia, people will tend not to save. 

A low level of household savings brings benefits and problems to the economy. Firstly, fewer savings can be interpreted to more spending. Australian spends more of their income on consumption, and that contributes to the national GDP. Because the GDP can be represented as the total aggregate expenditure. So low saving rate may stimulate economy growth in short term. Plus, Australian family could possibly enjoy a higher living standard, due to, they relatively spend more. However, the low household saving level generates identical threat to long-run economic prosperity. The economy’s long-term output is defined by its productivity.From the Cobb-Douglas production function, we find out the capital is one of the primary factors that affects the GDP. An economy acquires the capital stocks through investment spending, and the funds supplied to the investments are based on the national savings. Consequently, the low household saving will carry out a chain effect, that eventually decrease the country’s total output and thereby the future economic growth. Besides that, the level of savings have impact over the nation’s merchandise trade balance. It is easy to comprehend, since the country with the lower extent of saving will spend more on consumption of both domestic and imported goods. Which can be expected to leave a trading deficit.The deficit will outflow the country’s resources, thereby restrain the economic growth. Nevertheless, these problems caused by the low household savings might be overstated, because other parts consist the total national savings, in particular, the firm and public saving can be relatively large. Therefore, the overall saving maintains a decent level.

In conclusion, the different economic and social circumstances crates distinct saving propensities between China and Australia. Perhaps we should save more in the future for the common interest on both private and national factor.