The personal savings rate in Asian countries is often much higher than in Europe or the...

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?

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Expert Solution

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.

jeff jeffy answered 1 year ago

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