In a Stalla practice question it is stated that high savings rate is a helping factor for economic growth. Here is my problem with it. While a high interest rate counters inflation which is bad for the economy, it discourages consumer spending. When the Fed lowers rates one of their main reasons is to stimulate economic growth. Anyone has any insights on this, and does this question fall under one of those ambiguous territories in Econ?
Saving in this case does not exactly translate into depositing money in a savings account. It is sort of lumped together with investing. The idea is that when “saving and investing in new capital” increases, the amount of capital per worker and real GDP per hour of labor increases as well, thereby increasing labor productivity which promotes ongoing economic growth.
I must agree with the post above. You have to look at two factors - the amount of money saved and the interest rates understand them separately and think of the aggregate result. Saving makes more money available and if money is saved that means is not consumed which implies easier acces to funds for investing. The fact that usually savings are incouraged by high interest rates is something different and needs to be looked at case by case.
Thanks for the above explanation. Also, do increases in capital per worker mean higher wages per worker?
I should in a perfect world but not necessary. more capital should mean more investments in technology, that would mean more efficiency and translate into lower costs or it could mean higher qualified workers and again more efficiency. lower costs would leave room for an increase in wage
"Re: Economic growth & interest rate new Posted by: gz2nyc (IP Logged) [hide posts from this user] Date: February 11, 2008 12:26PM Thanks for the above explanation. Also, do increases in capital per worker mean higher wages per worker? " More capital means more demand for workers to operate that capital. NOw you have a typical supply and demand problem. By increasing the level of capital the demand for workers will increase, now the question is, Do an increase in demand results in higher worker prices (salaries), the answer will depend on how tight is the supply, if there is a lot of unemployed people around looking for jobs the labour supply elasticity will be low, therefore there would not be wage increases, or this will be very little. On the other hand, if unemployment is low (tight labour market, then, high supply elasticity) the increased demand for workers will result in higjer wages. Short answer? Will generate wage increases if labour market is tight, will not generate significant wage increases if there is high unemployment.