In: Finance
The personal savings rate in Asian countries is often much higher than in Europe or the U.S. For instance, the personal savings rate in the U.S. is around 5%, while the same rate in China is around 30%. What impact will this have on the growth of capital stock in the U.S. vs. China?
In the above question, suppose that savers in China decide to put a significant portion of their savings into financial instruments in the U.S. For example, suppose they decide to buy U.S. government bonds and the bonds of U.S. companies in order to invest their savings. How would that affect the growth of capital stock in the U.S. relative to China?
The growth of capital stock will happen at a much lower rate in
USA than in China. This is because of the fact that China has a
much higher savings rate of 30% than USA’s rate of just 5%. Higher
amount of savings in China will allow higher level of investments
in China and hence the amount of capital being accumulated will be
happen at a higher rate in China than in USA. Higher savings rate
implies that new investment capital is being created. Thus we can
safely say that new investment capital is being created at a much
rapid pace in China than in USA.
In case the savers in China decide to put a significant portion of
their savings into financial instruments in the U.S. then the rate
of growth of capital stock in USA will increase. This will happen
because U.S. will now receive savings from China which can be used
by U.S. as investment capital. Also as a chunk of Chinese savings
migrate to U.S. the level of investment capital in China will fall.
The financial and economic rule is that capital determines output
and output determines capital accumulation. Thus capital
accumulation will increase in USA and decline in China as a result
of more Chinese investing their savings in U.S. government bonds
and the bonds of U.S. companies.