I just did a quesion with the answer below. I thought China’s saving rate is around 50%. How come they mention in the answer that high GDP growth rate will lead to low savings? Thanks!
Rapidly developing economies like India and China have high GDP growth rates and therefore are most likely to have a:
) High real rate, low inter-temporal rate of substitution and a high rate of current borrowing by investors. High GDP growth leads to higher future expected incomes and therefore high rate of current consumption (low savings, high borrowings) and a low inter-temporal rate of substitution.
High GDP growth = high inflatory rate.
High GDP growth = high returns on risk assets (even likely to appear bubbles on those markets (eg.equities, real estate))
= high risk tolerance
= inexpensive and widely available capital
Bottom line = Low yields on savings
often seen scenario in the emerging markets
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Just look at the GDP calculation from the spending method: Saving is not present. This means that savings do not feed current GDP.
When a country saves today, the current consumption and investment is lower than if it didn’t save nothing or little. So, when GDP grows fast, the saving rate is low (in a relative sense).
For example, country A has a high saving rate since 10 years ago, hence a relative low GDP growth. However, the prospect is that by the time all those savings are released into consumption and investment, the GDP growth rate will be much higher than before.
Hope this helps.
Great to know these. Thanks for all the help!