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The personal savings rate in Asian countries is often much higher than in Europe or the...

The personal savings rate in Asian countries is often much higher than in Europe or the U.S. For instance, the personal savings rate in the U.S. is around 5%, while the same rate in China is around 30%. What impact will this have on the growth of capital stock in the U.S. vs. China? THANK YOU!

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Answer #1

When interest rates increase, investment falls thus causing capital stock to decline and economic growth to fall. Higher interest rates are likely to reduce investment in China. The higher rate raises the borrowing cost and thus will require investment to have a higher rate of return to be profitable. A 30% interest rates can eat into net income of companies' in China through higher payments of interest, or result to lack luster growth due to slower expansion. It will eventually decline the growth in aggregate demand in China and hence correct the tendency towards deficit on the current account. On contrary a low interest rates is likely to increase investment as well as capital stock in United States.

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