Question

2. Singapore has a saving rate that is roughly three times greater than that of the United States. Its greater saving rate has been one reason why the Singapore economy has grown faster than the U.S. economy. Suppose that if the United States increased its saving rate to, say, twice the Singapore level, U.S. growth would surpass the Singapore rate. Would that be a good idea?

Answer 1

Saving rate is critical for accomplishing high growth rate. Saving leads to rise in investment. Investment causes rise in output and employments.

But sharp rise in saving would obviously lead to rise in the growth rate over the long run, But rise in saving also causes fall in aggregate demand. Saving can be increased only by decreasing consumption level. Rise in saving would cause fall in consumption. Decline in consumption will severely retard the growth rate of economy in short run.

Thus, it is not true that sudden rise in saving will double the growth rate of US economy. There must be gradual rise in saving that would help to get higher growth rate over the long run.