Principles of Economics- Mankiw (5th) 521

Principles of Economics- Mankiw (5th) 521 - CHAPTER 24...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 24 PRODUCTION AND GROWTH 539 investment. (Or, perhaps, high growth and high investment are both caused by a third variable that has been omitted from the analysis.) The data by themselves cannot tell us the direction of causation. Nonetheless, because capital accumula- tion affects productivity so clearly and directly, many economists interpret these data as showing that high investment leads to more rapid economic growth. DIMINISHING RETURNS AND THE CATCH-UP EFFECT Suppose that a government, convinced by the evidence in Figure 24-1, pursues policies that raise the nation’s saving rate—the percentage of GDP devoted to saving rather than consumption. What happens? With the nation saving more, fewer resources are needed to make consumption goods, and more resources are available to make capital goods. As a result, the capital stock increases, leading to rising productivity and more rapid growth in GDP. But how long does this higher rate of growth last? Assuming that the saving rate remains at its new higher level,
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Ask a homework question - tutors are online