Exam 2 - SAVINGANDINVESTMENT

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Exam 2 Notes 13:31 SAVING AND INVESTMENT Solow growth model predicts that  rate of savings/investment  is critical for development o Where can the savings and investment come from? Where can the savings and investment come from? Outline     Data on savings, investment and growth Sources of investment/savings Data on  saving, investment, and growth Review: How are they related in the Solow model? o Savings=investment o Higher rate of savings/investment i.e higher s, gives: Higher medium-run growth Higher long-run income levels. Do we see these in the data? There is a positive correlation between how much a country is saving and how much they are  growing. Data are consistent with higher savings/investment causes growth…Why? o Correlation does not imply causation
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Ex: heart attacks and ice cream o Some other factor could be causing high growth and high rates of return and, so, high  investment/savings o Overall, we do not have strong proof of causality in this case Data on  savings, investment, and growth Does savings equal investment? Not always! It does in a closed system, e.g a closed economy (no interaction with other economies) or the  world (the world isn’t trading with other worlds) But, in an open economy,  foreign savings  can fund the domestic investment. Domestic investment can be smaller than domestic savings. Excess savings is put into investment in other countires. SOURCES OF INVESTMENT AND SAVINGS In fact, investment can come from a number of sources Key macroeconomic equation: I=S P +S G +S F o S P =Private, domestic savings o S G =Government, domestic savings o S F =Foreign savings Basic point: all domestic investment must be funded by domestic savings (private or  governmental) or foreign savings S P = domestic savings in the private sector, has several basic forms o Corporate savings: retained earnings of corporations Typically not a large item in developing countries
Background image of page 2
o Household savings: the part of the household income not consumed Includes savings in banks as well as savings in investment goods like livestock. Includes retained earnings of non-incorporated business-informal family firms, ect. S G = domestic savings by government o How can the government save? S =T-G T= government revenue, mainly taxes G=government consumption o Government savings  is government revenue not spent on government consumption Government consumption includes salaries, supplies, military expenditure,  infrastructure maintenance interest payments It does not include expenditures on building roads, schools and other infrastructure—
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 20

Exam 2 - SAVINGANDINVESTMENT

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online