Question

The saving rate in the United States is low compared to many of the countries with which the United States currently trades. If the United States was a closed economy, what would be the consequences of that low savings rate? The United States is not a closed economy however, but rather than an open economy. How does that change the answer to the closed economy scenario? Be thorough in your explanation.

Answer 1

If the United States was a closed economy, then low savings rate in the economy would have led to increase in the rate of interest in the economy which would lead to fall in the level of investment in the economy. As the level of investment in the economy falls, the overall production level will decrease in the economy and this will reduce the level of National Output in the economy,. Thus, if US was a closed economy, then decrease in the level of savings would have reduced investment and production level of the economy.

However, since the United States is an open economy, there are net capital inflows in the economy because of investors investing their money in the country to reap higher returns because the level of investor sentiment in the economy is high and growth rate is increasing. This capital inflow from abroad is used in financing the level of investment of the United States and maintain economic growth rate of the nation. Thus, in a closed country secnario, there is no way to finance investment when level of savings are low while if the economy is open, then investment can be financed through capital inflow from abroad.