6/4/15

Is a higher savings rate good or bad for long run growth?




This post goes over a simple discussion (based on principles concepts) of the act of saving and its affect on an economy's long run growth. The short answer is that yes, higher savings rates are good for long run growth. However, there are a few caveats. If we begin with the simple assumption that:

Y = C + I + G

We find the first argument against saving because it lowers C (consumption) which reduces Y (Gross Domestic Product). We hear this argument on the news often, because of the assumption that our economy is driven by consumer spending. However, if we add another assumption:

I = S

This supposes that I (investment) in the economy is going to be equal to S (savings), so the reduction in consumer spending is going to be 100% offset by the increase in investment spending with no impact on GDP.

However, this is a static equation. If we explore the Solow model which introduces growth, we can explore the nuance in saving a little deeper.

If you explore the Solow growth model in depth, you find what is called steady state condition where the amount saved (and therefore invested in capital) must be equal to the amount of capital lost due to depreciation (or if we care about well being and not just the economy, population growth as well).

If we imagine a factory, we know that things within the factory will break down over time and will need to be replaced. This is called depreciation. In order to acquire the money to pay for this maintenance we need investment which comes from savings. If our savings are inadequate to cover depreciation we will see less factories (capital) over time which reduces productivity in the economy.

However, if the amount we save is larger than depreciation we will see new or larger factories (more capital) form. This is considered good for the economy because it increases productivity.

No matter the savings rate, more savings will translate into more capital. However, more capital means that we will have more depreciation and need more savings to maintain the higher capital levels. This might not sound like a big deal, but remember that everyone has to choose between saving and consuming.

So saving more is good for long run growth, but it comes at the cost of current consumption. Most people enjoy consuming things (especially food, housing, smart phones, etc.) and it can be hard to motivate people to curb consumption to boost savings. However, if savings become small enough, we will actually see depreciation overtake savings and the economy may shrink (assuming population growth is 0).
Spread the knowledge!
Technorati Digg This Stumble Stumble Facebook Twitter

1 comments:

Diệu Ngọc on February 14, 2017 at 11:43 PM said...

Amazon chỉ ship về Việt Nam với các sản phẩm đơn giản, dễ thông quan, đặc biệt là sách. Các mặt hàng này đều có chú thích sẽ ship về Việt Nam bên phải sản phẩm Kinh nghiệm mua hàng trên Amazon . có rất nhiều bạn đọc quan tâm rằng Mua hàng trên amazon có uy tín không, nếu không có kinh nghiệm mua hàng từ Amazon, không rành các thủ tục mua hàng thì bạn nên tìm đến những đơn vị mua hộ uy tín, chất lượng để yên tâm hơn.
Có thể nói, năng lượng hoạt động của cả ngày ngoài việc phụ thuộc vào chế độ dinh dưỡng mà còn bị tác động trực tiếp từ giấc ngủ. Địa điểm mua chăn ra gối nệm giá rẻ giúp bạn có những giấc ngr tốt hơn. Khi đi mua sắm gối cho bé nhà bạn nên chú ý đến chiều rộng, chiều dài và độ dày và cũng cần lưu tâm đến chất liệu gối cùng với vỏ bọc gối chăn ga gối đệm cướitrẻ sơ sinh có nên nằm gối lõm để tốt nhất cho con trẻ.

Post a Comment

 

I invite you to join dropbox!

I invite you to join dropbox!
Use the above link for an extra 250MB Free!
All content on this site is the copyright of webmaster. No re-posting is permitted. Powered by Blogger.
VigLink badge

Post Archive

| FreeEconHelp.com, Learning Economics... Solved! © 2009. All Rights Reserved | Template Style by My Blogger Tricks .com | Design by Brian Gardner Back To Top