What is the relationship between domestic saving, investment and economic growth?

Economic growth is defined as the increment in the inflation-adjusted market value of the goods and services produced by an economy in a particular time period. Economic growth represents the country’s socioeconomic wellbeing and quality of life in terms of financial value. This is an indicator to shows how the nation economically developed and stable. Generally, economic development or growth is measure as the percentage increase in the real gross domestic products (GDP). Economic deeds are interconnected with almost all the activities that human being performed and the economic theory is the central theory of development, politics, policy practicing, productions, distributions, consumptions, and many more theories existing and was practiced in the past as well.

Long-term economic growth depends on capital formation and capital formation depends on the saving behavior of people in the economy. In general, increasing aggregate savings push to higher investment and lead to higher GDP growth in the short run. It means that a higher saving rate leads to a higher amount of capital formation and a higher amount of capital formation result in a large amount of capital investment. A large amount of investment injects into the economy that increases the production, employment, and income level of the people.

Financial system development and stability helps to promote capital formation and economic growth sustainability. The study also says the savings is positively associated with productivity growth in poor countries but it has negative impact on rich countries. Domestic savings matters for innovation, entrepreneurship, and technology transfers in least developed and developing countries. In contrary, domestic entrepreneurs are already familiar with advance technology and do not need to attract external investment on innovation and technology. Thus, domestic savings does not matter for growth. But for the least developed and developing countries, a low range of savings can be a constraint for domestic capital formation and investment which ultimately gives a low economic growth and income.

This paper is to examine the relationship between domestic saving, investment, and economic growth in Nepal.
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