Part Three

PART THREE

Saving, Investment,and Capital Flows

Announcements

• October 16-Thursday: No Class – Traveling to Sweden & Africa/Ethiopia to attend conferences

• Will return October 26 Sunday late Afternoon• October 30, Thursday,Test #3 (Chapters 10,11,12,13) • Tuesday & Thursday -October 21 & 23 classes

will be covered by Dr. Happy Siphambe. • He will cover chapters 11, 12, & may be 13? • Midterm grades are posted. Check them. • If you have questions contact me by e-mail at:

sisay.asefa@gmail.com

Chapter 10

Chapter 10

Saving andResource

Mobilization

Norton Media Library

Dwight H. PerkinsSteven Radelet

David L. Lindauer

Chapter 10: 0utline

• Saving and Investment around the World • A Saving Taxonomy • Household Saving and Consumption

– The Keynesian Absolute-Income Hypothesis – The Relative-Income Hypothesis – The Permanent-Income Hypothesis – The Life-Cycle Hypothesis – Growth and Saving: Which Causes Which? – Other Determinants of Private Saving

• Corporate Saving • Government Saving • Foreign Saving

Learning Objectives-Chapter 10

• The record of saving and investment in developing countries.

• The relationship among tax revenues, public sector expenditure, and government saving.

• The observed patterns of household saving behavior and the theories of household saving.

• The importance of foreign private saving. • The relationship between growth and savings • The different impacts of corporate saving, government

saving, and foreign saving

Capital Fundamentalism

• The development strategy of the 1950s & 60s was “Capital Fundamentalism”

• Related to theories of Economic Growth such as Harrod-Domar Model, Lewis Model

• Data for Savings, Investment for countries table 10.1

• Patterns of Savings Around the world

Key Component of Saving

• Interrelationship of key components of savings• Total saving= Domestic + Foreign Saving• Domestic =Government + Private saving• Foreign Saving= Official + Private • Private = Household + Corporate• Official = Grants + Loans• Private= Debt + equity

See Figure 10.3

Household Saving and Consumption

Two main reasons of savings by households:

1.To Generate future income

2. To Protect against unexpected fall in income. “Precautionary motive”

Theories of Household Saving Behavior

• Theories that explain 3 observed patterns

• 1. within a particular country at a given time

• 2. Within particular country over time

• 3. Across countries savings vary with no clear relationship to income

4 Alternative theories of Saving behavior

• 1. Keynesian Absolute-Income Hypothesis

• Household saving= f( disposable income)

• C= c* + (1-s) Yd :where C= private consumption, s= marginal propensity to save, and Yd= disposable income

• If s=0.15, c*=autonomous consumption

• If S=Yd then S= -c+sYd

Keynesian Absolute Income Hypothesis

• This idea is shown by Figure 10.4

• To the left of A, consumption exceeds disposable income and saving is negative

• To the right of point A, Saving is positive

Consumption & Saving in the Short run and long term with rising income over time

• Figure 10.5 shows the following• 45 degree line shows all points where consumption +

saving = Income

• 4 Short run functions for each year 1990, 2000, 2010, and 2020 are show what people would have spent at various levels in those years

• The flatness of the these curves shows consumes do not change consumption habits in the short-run

• In the long consumption path is more less flatter or more steper.

The Relative Income Hyothesis –Dusenberry hypothesis

• The Dusenbery hypothesis is a form of relative income hypothesis based on the idea consumption and saving depend not only on current income but also on previous level of income.

• Cd1= (c +bCh) + (1-s) Yd1• Cd1, Yd1= consumption & income in period 1• Ch is previous high consumption level• b= is constant regardless of income. The basic idea is

that consumption in the current economy tends to rachet upward overtime as income grows.

• The relationships between Absolute income hypothesis and that of Relative hypothesis is shown in figure 10.4

Dependency Ratio

• Dependency Ratio from young population 15 yeas or less

• What is the Impact of dependency ratio on Savings & Investment?

• Dependency Ration from Older (retired) non-working Population over 65

• Where does the main dependency ratio come from for ICs and LIC’s? for Africa?

End Chapter 10

This concludes the Norton Media LibrarySlide Set for Chapter 10

W. W. Norton & CompanyIndependent and Employee-Owned

Economics ofDevelopment

SIXTH EDITION

ByDwight H. Perkins

Steven RadeletDavid L. Lindauer