Macroeconomics Assignment Answer...

MACROECONOMICS ASSIGNMENT 1
1. Use the data on savings and economic growth given in the Excel file to plot the relationship between
savings and economic growth in South Africa. Interpret the results [10 MARKS].
MENTION AND EXPAND THE FOLLOWING POINTS:
● The plot above shows the comparison between the growth rates of household savings
and GDP growth rate in south Africa from 2001 to 2022. The y-axis shows the growth
rate for both GDP and household savings, while the x-axis shows the year.
● When the GDP growth rate is lower, in most cases gross savings tend to be higher, this
may be due to a precautionary behaviour of having enough savings by households to
remain sustained in bad economic situations.
● The lowest GDP growth has been during 2020, which also affected the savings rate partly
negatively, thus this could be due to the COVID-19 pandemic that occurred which
affected most economies.
● Soon after the event of COVID-19, the economy began to rise above 0%, so the savings
rate began to climb which may be that people are trying to save to avoid the
consequences of another phase of the COVID-19 pandemic.
● In most cases throughout the years, the growth rate of gross savings remains higher than
the GDP growth rate.
In the years 2004, 2005, 2006, 2010, and 2011, the GDP growth rate was higher.
● The cost of living in South Africa has been rising faster than wages for many people. This
may have caused them to cut back on spending and save more money.
● Both growth rates (gross savings and GDP growth) do not possess a linear relationship
with each other, thus the points on the Scatter plots are dispersed and do not show any
linear correlation.
2. Use a statistical software of your choice to check for a simple correlation between
savings and economic growth in South Africa, and interpret the results [10 marks].
CORRELATION (R) = 0.156
 Correlation > 0.
 Correlation close to Zero.
 Suggests a positive correlation between the saving rate and GDP growth rate.
 The correlation is weak ( correlation < 0.5 and not close to 1 )
 Factors like foreign direct investment, government policies, and other external
factors may be responsible for explaining the GDP growth rate.
 Small tendency to change GDP growth when gross savings change.
3. In two paragraphs, write down what the Neoclassical model predicts about this
relationship and compare it to your results [15 MARKS].
Mention and expand the following points:
● Savings play a crucial role in economic growth.

● Higher savings rates lead to more investment in capital which in turn drives economic
growth.
● In the long run, economies converge to a steady state.
● Neoclassical model predicts a positive correlation between the household savings rate
and GDP growth rate.
● Comparing this prediction to the empirical results from the provided data on South
Africa.
● This positive but relatively weak correlation suggests that while there is some
relationship between savings and economic growth, it is not particularly strong.
● The scatter plot and regression analysis also support this.
● Showing a broad spread of data points with no strong linear
Trend.
● Other factors such as investment efficiency, government policies, external economic
conditions, and structural issues in the economy likely play significant roles in
determining GDP growth.
4. In two paragraphs, write down what the literature predicts about this relationship
and compare it to your results [15 MARKS]
Mention the following points:
● The literature suggests a positive correlation between savings and economic growth.
● According to one theory, higher savings translate into more money that can be
invested.
According to Bebczuk (2000), investment increases productivity, which in turn promotes
economic growth.
● The idea that higher savings drive economic growth is supported by empirical data.
● These studies demonstrate that higher domestic savings rates are correlated with higher
economic growth rates.
● Economic growth theories suggest that the dynamics of a country's growth increase if
there is substantial investment in human capital.
● However, access to international financial markets can influence the relationship
between domestic savings and economic growth.
● If a country can secure foreign investments, it may not rely solely on domestic savings to
finance growth.
● This access allows for investment financing through foreign savings, potentially
diminishing the direct impact of domestic savings on growth.
● Compared with empirical results above for South Africa, it shows that savings do indeed
impact the growth rate, but not fully.
● As they have a slightly positive relationship, and almost negative (r<0.5).
● Other stronger factors may be responsible for GDP growth.
● Thus, the empirical results of South Africa above may be related to what the literature
predicts but not exactly fully.

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MACROECONOMICS ASSIGNMENT 1

MENTION AND EXPAND THE FOLLOWING POINTS:

CORRELATION (R) = 0.156

Mention and expand the following points:

● Savings play a crucial role in economic growth.

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