Key Economic Data
Hints on analysing data
This page is designed to give you some help with analysing data. We have chosen to look at the relationship between the savings ratio and the growth in GDP.
Stage 1:
The first thing to do is to ensure we understand the hypothesis associated with these variables and what these variables actually mean. The output page will give you a definition of the variables you have chosen. In this case, the definitions are as follows:
GDP - A measure of the growth of the economy over a period of time shown by the change in the value of goods and services produced in an economy over a period (usually a year).
Savings ratio - The proportion of income earned devoted to the postponement of current expenditure (saving) as opposed to consumption. In theory, Income (Y) = Consumption (C) + Saving (S). It suggests that we must do something with our income, either spend it on goods and services or save it. A rise in saving therefore implies a fall in consumption (assuming income remains constant).
Stage 2:
The next stage is to establish the hypothesis we are seeking to find evidence for.
In theory, a rise in the savings ratio would mean that people are choosing to save more of their income. If this is the case, then they will be spending less given that consumption is a key part of the aggregate demand (AD) function.
Since AD = C + I + G + [X - M]), it would indicate that AD would fall. What we would expect therefore are rises in the savings ratio to be accompanied by a reduction in GDP.
Stage 3:
Now we need to describe what is happening to the data we have selected.
The savings ratio began the series at around 9%. It rose to nearly 11% in early 1995 before gradually falling back to a low of around 4% in early 2000. It then rose to around 7.5% by the middle of 2001 before falling back again to between 5 and 6% in 2003. The overall trend of savings has been down over the period. There has been a marked degree of volatility in the savings ratio over the period.
GDP growth rates over the same period have been far more stable. A high of 2.32 in period 1 of 1997 and a low of 0.27 in the third quarter of 2001. The trend has been much more stable but with a slight fall over the period.
Stage 4:
We now need to make some evaluative judgement of the relationship between the two variables. This can be done by pointing out specific links you may have spotted and them arriving at a judgement about the validity of the links you have found.
If there were to be an inverse relationship between the two, we would expect to see spikes in savings resulting in a fall in GDP in some time period following. The fall in the savings ratio from 9.7% in the fourth quarter of 1997 to 4.2% in the first quarter of 1991 is associated with a rise in GDP from 0.91 in the third quarter of 1997 to 2.31% by the third quarter of 1998. This trend however is reflected elsewhere, for example, the savings ratio rises from 4.1% in the first quarter of 2000 to 7.5% a year later with GDP falling from 1.92% to 0.63% in the last quarter of 2000. The trend however is not consistent since GDP growth climbs back to 1.89% by the first quarter of 2001.
Stage 5:
Having made some observations, we need to explain some of the reasons for the conclusions we have come to. This might involve trying to think of the nature of the variables under consideration.
The relationship does not appear to be very strong. There could be several reasons for this. The amount of income saved by UK citizens could be relatively small and therefore wide fluctuations in the savings ratio have little impact on the overall pattern of GDP although it might be said to be one factor exerting an influence on the level of growth of GDP.
The time taken for people to adjust their savings plans may be influenced by the type of savings comprising the ratio. For many people, savings take the form of investments into pension funds and insurance policies as opposed to deposits in accounts in banks and building societies. Such long term savings plans therefore are not likely to be that responsive to changes in interest rates and likely to be a fairly stable proportion of annual income devoted to that purpose.
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