Chapter 39, Problem 1CYU

To determine

The question requires us to determine the link between a nation's growth rate, investment spending, and domestic savings.

Explanation of Solution

A positive change in national income represents growth which happens due to the increase in the value of aggregate demand and aggregate supply in an economy.

Let’s see the link between a country’s growth rate, investment spending, and domestic savings in the following two steps:

1. Domestic savings is the sum of household savings, private savings by firms and industries, and government savings. An increase in domestic savings increases the supply of loanable funds in the market for loans and thus encourages investors to raise their investment spending by taking loans at lower borrowing costs.
So, an increase in domestic savings causes investment spending as a percentage of GDP to increase in the economy.
2. The aggregate demand is the sum of consumer spending, investment spending, government expenditure, and net export. An increase in any of these factors will cause the aggregate demand and thus national income to increase.
An increase in investment spending due to an increase in domestic savings will help the firms in installing new machines, and equipment, expanding their branches, hiring physical and human capital, and improving their existing infrastructure. These improvements will increase the aggregate production level in the market and as a result, the growth rate of the national income will rise.

Economics Concept Introduction

An increase in the aggregate production of goods and services in an economy over time is considered economic growth. Economic growth is a quantitative measurement as it represents growth in numerical form in terms of GDP or National income. It doesn’t say much about the quality of growth in a country.