just have a small question on how to answer the following question:
Extract F (lines 7-8) argues that ‘the potential significance of household savings
for UK macroeconomic performance needs to be recognised’.
Using the data and your economic knowledge, evaluate the significance of
household savings for UK macroeconomic performance.
(from Jan 2009 AQA part D, unit 2)
how would go about answering and structuring it?
savings and significance to macro performance watch
- Thread Starter
- 03-04-2011 14:43
- PS Helper
- 03-04-2011 17:42
Hmm that's a pretty hard question for 25 marks. The main point is that savings in banks provide the funds for investment which is necessary for an economy to grow sustainably. Increased saving also means lower interest rates (as there is more supply of money for the same demand). However savings can't be too high because MPC and MPS are inversely related. If MPS goes too high then consumption will suffer and therefore aggregate demand will slow which could cause the UK economy to stop growing in the short term. You could then go on to talk about various monetary and fiscal policy ways of encouraging/discouraging savings e.g. lowering the base rate to encourage consumption or increase the tax levied on savings. Supply-side policies to encourage investment like deregulating investment laws, tax relief on investment, getting rid of red tape etc etc.
So that's what you could include, I guess you'd just structure it in a logical order, starting off with what savings are and how they relate to consumption, then just take it from there?
(Original post by tateco)
- 03-04-2011 21:07
Increased saving also means lower interest rates (as there is more supply of money for the same demand).
- PS Helper
- 03-04-2011 22:05
- 05-04-2011 17:11
Yes think of loanable funds.
Investment relies on loanable funds. Where do these come from? Three sources:
Private saving (ie you do Y-T and you get disposable income, part of this is saved, part of this is consumed (how much depends on the marginal propensity to consume), the part of disposable income which is saved, is private saving)
Government saving (ie T-G, when the government runs a surplus it is saving and providing loanable funds, when the government runs a deficit it is borrowing, and competing with private sector investment for loanable funds, hence the idea of government borrowing 'crowding out' private sector investment)
Borrowing from abroad (if a UK firm can raise investment funds from overseas investors then it is borrowing from abroad, that means the foreign investor will be able to claim returns on the investment in the future, which will count against the UK current account balance (which is net exports plus net investment income from abroad))
So the UK household savings rate influences private saving.
Now at the moment the UK is running a (high) government budget deficit, so the government needs loanable funds. The UK private sector needs loanable funds if it is to invest. Where will they come from? Private saving or abroad. So the higher the UK household savings rate is, the more of the loanable funds needed will come from within the UK. If UK households are not saving much, then the loanable funds will need to mainly come from abroad, which means the returns on the investment will end up flowing out of the economy in the future, where if they were going back to UK savers, they would be held within the economy.
- 05-04-2011 21:22
Throw a bit of aggregate demand in there:
"Household saving is defined in the OECD's Economic Outlook as household sector saving as a per cent of household sector disposable income." Ref 1
Suggest implications it may have on household spending (Consumer expenditure)
Consumer expenditure is largest component of Aggregate demand