Question

Consider two economies in which the population is stable; they are identical in every
respect except that households in economy A save more of their income than households in
economy B. How will these economies differ in terms of the level of output, labour
productivity, and the growth rates of output and productivity? Explain.
Now consider countries C and D, both identical except that firms in country C allocate more
resources to research and development (which tends to lead to improvements in
production) than those in country D. How will these countries differ in terms of the same
variables above?

Answer 1

Higher savings lead to higher investment in the economy.This generally leads to capital formation.This therefore results in higher level of output due to more and better capital. Availability of more savings offers a chance for investment in physical as well as human capital. This results in an increase in labour productivity due to upgradation of the two primary factors of production ie. Manpower and machinery.Therefore,the level of output and labour productivity of A shall be higher than that of B.Since more resources (savings) are invested in the human and physical capital in A,the growth rates of output and productivity shall also be higher than B due to skilled labour and advanced machinery.

Research and Development is the key to today's competitive market and innovation.Though R&D does not always lead to innovation (as seen in various cases),it is an integral part of the innovation process.Thus,allocation of more resources to R&D will increase the quantity and quality of production ;thereby causing an increase in the national income and trade of the economy (as in comparison to D which shall not reap the benefits of such technological advancements).