TASK

• Savings (and consumption) play a central role in macroeconomic analysis. In this question, we will discuss a number of aspects connected to changes in savings.

Consider the following graph that describes the evolution of the World Saving Rate.

• What does the Solow (neoclassical) growth model say about the evolution of the steady state capital per worker ratio.
• What does this evolution suggest happened to world real interest rates? And what does it say about the world real wage?
• Notice that part of the increase in savings is explained by the growing importance of China and India in global GDP (though by no means the only factor). What does the graph suggest happened to the global distribution of income?
• Simultaneously with the higher savings rate, the world has also had slowing growth. This is in part due to lower population growth rates (n) but also because of slower productivity growth (g). What does slower productivity growth suggest should happen to investment for a given real interest rate?
• Now divide the world in two blocks. What does your analysis suggest happens to countries that have not had as significant an increase in savings?
• What would your analysis suggest happens to those countries real exchange rate?