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Q3 The USA has a very high K/N, even higher than the K/N for Germany. Yet,...

Q3 The USA has a very high K/N, even higher than the K/N for Germany. Yet, the household savings rate in the USA is only about 1/3 the rate for Germany. How can this situation arise?

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Answer #1

A very high K/N ratio means that the there is a lot a investment made in physical capital. This is possible when a country has high savings rate. So, in any normal scenario, one would expect a country with a higher savings rate to have a higher K/N ratio. But there are always exceptions. In this case, USA has a higher K/N ratio than Germany even though the savings rate in Germany is greater than the savings rate in USA. This is possible when the investments made in a country is not in physical capital. So, when a country invests a lot on human capital than on physical capital, it will tend to have a lower K/N ratio. Thus, probably because Germany is investing a lot more on human capital than on physical capital, it has a lower K/N ratio than USA even after having a higher savings rate.

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