Per Capita Income, the Growth of Income and the Savings Ratio

Abstract

If the growth rate, and the level of per capita income, can be raised by government policies which induce capital formation and lower the capital-output ratio, the domestic savings ratio may rise independently of the inflation rate because of the dependence of the savings ratio on the level of per capita income and the growth of income itself. The time series and cross-section evidence is overwhelming that the savings ratio is positively related both to the level of per capita income as a measure of living standards and also to the growth of income.¹ Economic theory predicts a positive relationship. The interdependence between savings, growth and per capita income presents statistical identification difficulties in the estimation of the precise relationships, but the fact that there is mutual dependence suggests that development via capital formation is a cumulative process which, if given a push, can gather its own momentum.