Prashanth Mohan
Whether an increase in savings rate leads to change in economic growth and so a change in living standards can be tackled in a multitude of ways, but first a few relevant points can be made. The standards of living can be defined as “factors such as income..quality and affordability of housing..access to quality healthcare”. However, it can be argued that all these variables actually correspond to the level of growth in the economy. If economic growth rises, people will be able to pursue better healthcare, better education, more holidays etc., therefore it can be said that the standards of living have a strong correlation with the level of economic growth. Another relevant point is when an economy closed to international trade, we can assume that savings is equal to investment: S=I.
The relationship between savings-investment is fundamental in explaining economic growth. Firms produce many goods/services ie) commodities. Firms hire workers who help produce these goods and services, and are paid incomes in turn; theses incomes earned can then be spent on goods and services. However not all income that is earned is spent, instead a proportion is saved instead. Therefore when firms want to buy stocks of capital, they use the money that is deposited as savings, as the means of investment. This stimulates economic growth, “by investing firms create a demand for capital goods. These goods add to the stock of capital in the economy and expand the future capacity of production, generating economic growth.” When the level of investment is more than the level of funding necessary to replenish depreciated capital, the economy will grow. There are 2 models, which illustrate the effect of savings rate on economic growth called the Harrod-Domar and the Solow.
The Harrod domar model when expressed in terms of GNP, reads as g≡Yt+1-YtYt=sθ-δ .The numerator in the righthand expression is the savings rate s, while the denominator is the capital-output ratio θ, the “amount of
The relationship between savings-investment is fundamental in explaining economic growth. Firms produce many goods/services ie) commodities. Firms hire workers who help produce these goods and services, and are paid incomes in turn; theses incomes earned can then be spent on goods and services. However not all income that is earned is spent, instead a proportion is saved instead. Therefore when firms want to buy stocks of capital, they use the money that is deposited as savings, as the means of investment. This stimulates economic growth, “by investing firms create a demand for capital goods. These goods add to the stock of capital in the economy and expand the future capacity of production, generating economic growth.” When the level of investment is more than the level of funding necessary to replenish depreciated capital, the economy will grow. There are 2 models, which illustrate the effect of savings rate on economic growth called the Harrod-Domar and the Solow.
The Harrod domar model when expressed in terms of GNP, reads as g≡Yt+1-YtYt=sθ-δ .The numerator in the righthand expression is the savings rate s, while the denominator is the capital-output ratio θ, the “amount of