Growth Determinants (1)
Savings and Investment: from the circular flow we see household and firms save part of their income. Savings flow in the financial system and channelled to borrowers (firms and households)
Questions: does more savings necessarily means more growth?
Aggregate production function Y=f(K,L)
- Goods and services are produced using two factors of production. A production function is commonly used in microeconomics to describe how firms combine K and L. In this case, this is used to described the output production of the entire economy.
How do we finance investment?
- Remember that (S-I)+(T-G)=(X-Z)
So investment can be financed
by private savings by firms and households (S)
by government savings
by net savings of foreigners
- We assume that T=G →the government does not run a deficit
- We also assume Z=X → current account balance
Then I=S Investment is financed by domestic savings
- However, old capital depreciates, the proportion of capital that is lost is called depreciation rate and usually indicated with δ
- Definition of steady state
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