increased savings rate increases economic growth growth

Palantir

Schweser. Session 7 pg 134. I would think that if people in the US started to save more, they would spend less, which would lead to decreased economic growth. Is Schweser saying here that since people are saving money in banks, that there is more capital for businesses to borrow, which leads to growth? Seems more like a short term decrease in growth followed by "possible" expansion. Businesses can borrow money all they like at low interest rates, but if people are increasing the savings rate they still are not spending their money on unnecessary expenses. Can someone explain this better?

skycfa

i guess i am reading too much into this. increased savings = capital stock increase (K)? which increases Y?

Iginla2011

I don't have 2011 Schweser, but I think the answer is simple..

I guess, second explanation is right..

lcw77

If it only says saving more, then it doesnt necessarily mean spending less. (if income increases large enough, saving and spending could increase at the same time. I also remember there seem to be a Friedman's theory on consumer spending, which argues changes of consumer spendings are less volatile and kind of stable in long-term). I agree with the second explaination, saving more provides more capital for business activities. Personal opinion, hope it helps.

Zestt

2010band10 Wrote:
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> If it only says saving more, then it doesnt
> necessarily mean spending less. (if income
> increases large enough, saving and spending could
> increase at the same time. I also remember there
> seem to be a Friedman's theory on consumer
> spending, which argues changes of consumer
> spendings are less volatile and kind of stable in
> long-term). I agree with the second explaination,
> saving more provides more capital for business
> activities. Personal opinion, hope it helps.

Doesn't this violate ceteris paribus, the foundation of economic theory? Holding everything equal, including income, increased savings certainly seems to imply decreased spending. If you allow income to increase, how do you know it's the increased savings rather then the increased income that's causing economic growth? Relative increases necessarily result in relative decreases if you consider savings and spending two market share components of income.

wake2000

greater savings = greater future investment

oneboy

SkipE99 Wrote:
-------------------------------------------------------
> Schweser. Session 7 pg 134. I would think that if
> people in the US started to save more, they would
> spend less, which would lead to decreased economic
> growth. Is Schweser saying here that since people
> are saving money in banks, that there is more
> capital for businesses to borrow, which leads to
> growth? Seems more like a short term decrease in
> growth followed by "possible" expansion.
> Businesses can borrow money all they like at low
> interest rates, but if people are increasing the
> savings rate they still are not spending their
> money on unnecessary expenses. Can someone
> explain this better?

Increased saving = decreased consumption all else equal, AND increased investment. Investment being part of GDP, short term growth won't be affected. Potential long term growth will benefit from these investments down the road though.

If the increase in saving is used to finance investment in China or India, there is a problem though.

Chuckrox

we are all correct here, it is not absolute (mad) consumption that brings about Economic Growth, but Economic Growth is much faster with Investment in Capital goods brought about by Savings or Borrowing (borrowing will not happen if there are no savings!)

Me.tega is spot on, it is a global market, one country produces more (from increased savings and investment) and consumes less will achieve
Faster growth than the one which consumes more and save less. Example is China and USA

ll11

Gonna bump this in case it helps anybody else as I've been caught out by it twice now.

The savings rate refers to the number of people saving rather than the interest rate that they receive. If you mix them up, you'll end up with the effects going in the wrong direction.

Increase in savings rate leads to:
More capital available
Falling interest rates
Increase in GDP

Falling Saving Rate leads to:
Less capital available
Increase in interest rate
Decline in GDP

Analyze_This

Nice summary, mutton.