We are told that the annual contribution to tax free retirement accounts will increase , and therefore the Cobb Douglas production change in GDP would increase too.
I am unsure of this relationship and why it holds. What has retirement savings got to do with increase in K? and can you please explain exactly what capital encompasses in the CD Function.
Thanks
GDP through CD is a function of technological advances (as a multiplier) and the level of capital (think: fixed assets) and labor (think: population, benefits such as salary, etc). So clearly if retirement accounts contributions increase, this would increase the labor level, so GDP as a result as well. I would not think the level of capital would increase in this case. Where did you read this?
2013 CFA Exam, Econ question. It clearly says that Increase in retirement savings leads to increase in capital.
I originally put it had no impact as I could not understand how savings would impact L,K, or TFP, so presumed it was a trick question.
Can anyone else add further light?
ok, here’s what I think
increased savings combined with the bank-fractional-reserve system allow banks to issue more loans. these loans are obviously going to be business-type mostly and be used for lease or purchases of physical capitals.
even if the retirement savings are in pension fund form, those pension funds obviously have to invest in something. these investments allow the investee to finance capital expenditures.
far-fetched, but could work.
haha thanks Edbert. That is a very roundabout way of getting to an answer and would not come to me on the exam day.
S2000 you there? I’m lighting the beacon!
I agree with what has been said. Long term savings increases GDP, so even if the retirement savings was not in cash it would be part of “I” as ultimately it funds some project as long as it is domestic savings and investment. This is why many registered retirement savings plans have a domestic investment rule, I know Canada’s does. But I also know they relaxed the Canadian rules so you could invest a greater portion of your RRSP into say American listed companies, but honestly any foreign exchange is probably allowed.
The K in Cobb Douglas would definitely be money available so through reserve requirements and borrowing against assets under management of even just selling more T-Bills & Treasuries the US would have more capacity.
It’s pretty intuitive - increase in savings equals an increase in output which leads to additional capital stock. Check out the “Changes in Savings Rate” section: https://www.colorado.edu/economics/courses/econ2020/section14/section14-main.html