part three part three saving, investment, and capital flows
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Part Three
PART THREE
Saving, Investment,and Capital Flows
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Announcements
• October 16-Thursday: No Class – Traveling to Sweden & Africa/Ethiopia to attend conferences
• Will return October 26 Sunday late Afternoon• October 30, Thursday,Test #3 (Chapters 10,11,12,13) • Tuesday & Thursday -October 21 & 23 classes
will be covered by Dr. Happy Siphambe. • He will cover chapters 11, 12, & may be 13? • Midterm grades are posted. Check them. • If you have questions contact me by e-mail at:
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Chapter 10
Chapter 10
Saving andResource
Mobilization
Norton Media Library
Dwight H. PerkinsSteven Radelet
David L. Lindauer
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Chapter 10: 0utline
• Saving and Investment around the World • A Saving Taxonomy • Household Saving and Consumption
– The Keynesian Absolute-Income Hypothesis – The Relative-Income Hypothesis – The Permanent-Income Hypothesis – The Life-Cycle Hypothesis – Growth and Saving: Which Causes Which? – Other Determinants of Private Saving
• Corporate Saving • Government Saving • Foreign Saving
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Learning Objectives-Chapter 10
• The record of saving and investment in developing countries.
• The relationship among tax revenues, public sector expenditure, and government saving.
• The observed patterns of household saving behavior and the theories of household saving.
• The importance of foreign private saving. • The relationship between growth and savings • The different impacts of corporate saving, government
saving, and foreign saving
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Capital Fundamentalism
• The development strategy of the 1950s & 60s was “Capital Fundamentalism”
• Related to theories of Economic Growth such as Harrod-Domar Model, Lewis Model
• Data for Savings, Investment for countries table 10.1
• Patterns of Savings Around the world
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Key Component of Saving
• Interrelationship of key components of savings• Total saving= Domestic + Foreign Saving• Domestic =Government + Private saving• Foreign Saving= Official + Private • Private = Household + Corporate• Official = Grants + Loans• Private= Debt + equity
See Figure 10.3
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Household Saving and Consumption
Two main reasons of savings by households:
1.To Generate future income
2. To Protect against unexpected fall in income. “Precautionary motive”
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Theories of Household Saving Behavior
• Theories that explain 3 observed patterns
• 1. within a particular country at a given time
• 2. Within particular country over time
• 3. Across countries savings vary with no clear relationship to income
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4 Alternative theories of Saving behavior
• 1. Keynesian Absolute-Income Hypothesis
• Household saving= f( disposable income)
• C= c* + (1-s) Yd :where C= private consumption, s= marginal propensity to save, and Yd= disposable income
• If s=0.15, c*=autonomous consumption
• If S=Yd then S= -c+sYd
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Keynesian Absolute Income Hypothesis
• This idea is shown by Figure 10.4
• To the left of A, consumption exceeds disposable income and saving is negative
• To the right of point A, Saving is positive
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Consumption & Saving in the Short run and long term with rising income over time
• Figure 10.5 shows the following• 45 degree line shows all points where consumption +
saving = Income
• 4 Short run functions for each year 1990, 2000, 2010, and 2020 are show what people would have spent at various levels in those years
• The flatness of the these curves shows consumes do not change consumption habits in the short-run
• In the long consumption path is more less flatter or more steper.
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The Relative Income Hyothesis –Dusenberry hypothesis
• The Dusenbery hypothesis is a form of relative income hypothesis based on the idea consumption and saving depend not only on current income but also on previous level of income.
• Cd1= (c +bCh) + (1-s) Yd1• Cd1, Yd1= consumption & income in period 1• Ch is previous high consumption level• b= is constant regardless of income. The basic idea is
that consumption in the current economy tends to rachet upward overtime as income grows.
• The relationships between Absolute income hypothesis and that of Relative hypothesis is shown in figure 10.4
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Dependency Ratio
• Dependency Ratio from young population 15 yeas or less
• What is the Impact of dependency ratio on Savings & Investment?
• Dependency Ration from Older (retired) non-working Population over 65
• Where does the main dependency ratio come from for ICs and LIC’s? for Africa?
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End Chapter 10
This concludes the Norton Media LibrarySlide Set for Chapter 10
W. W. Norton & CompanyIndependent and Employee-Owned
Economics ofDevelopment
SIXTH EDITION
ByDwight H. Perkins
Steven RadeletDavid L. Lindauer