In: Economics
Why have development economists emphasized the importance of (a) the proportion of national income that is saved and (b) the rate of growth of the population (or labor force)? Illustrate your ideas with discussion of the Harrod–Domar or Cobb–Douglas economic growth models. Also draw on empirical evidence about savings proportions, as presented on the textbook.
The proportion of the income saved plays an important role in determination the economic growth rate of a nation. Considering Harrod Domar model, economic growth rate of a nation = Savings rate / ( Capital Output ratio of a nation). Thus, increase in the savings rate leads to increase in the economic growth of a nation. Also in the case of Solow Model, increase in the savings rate shift the savings curve up which increases the steady state rate of capital and output per capita. Thus, Harrod Domar and Solow both emphasizes on increasing the savings rate of a nation to increase the overall economic growth rate of the nation.
Solow Model states that national output in a nation grows at the rate of population growth rate. Thus, any increase in the rate of population growth rate increases the growth rate of output of a nation.
Considering the case of Chinese economy, it has very high savings rate and thus economic growth rate of the nation is also high. It is one of the fastest growing nations of the world.