plz help- Lower national savings (1 Viewer)

[tradewind]

I need an argument to support the quote from text book that with lower level of national savings, Australia has insufficent funds for consumption and investment spending"

My problem is that i don't understand how lower national savings can contribute to insufficient funds for consumption because wouldn't lower national savings mean that people are consuming more. If they are not saving, they must be spending?

it would be most helpful is someone helps

 

[i-color]

This is sort of related to the crowding out effect and the twins deficit argument. Low national savings (national savings = household savings + govt savings and firm sector savings) means that governments are forced to borrow oversea, causing a higher CAD (due to increase foreign debt and increase net incomes component of current account thus --> CAD higher) THis higher CAD would lead to a debt trap scenario with increasing amount of funds going overseas to fund our increase foreign debt, and this is a leakage in the circular flow. Thus, the economy contracts and there is less funds for consumption and investment as we send these overseas to fund our foreign debt.

I think your textbook is also saying in particular to Australia, because a lot of our spending tends to be on imported g/s, our funds are leaking out of our economy and also we are over-spending excessively on consumption goods and luxuries rather than capital goods. Thus, these funds are not being used for investment and productive goods...so we are just spending on "useless" things which do not increase our future capacity to produce.

I don't know if this is right....it was hard to actually grasp the exact reason.

 

[tradewind]

so as a result of debt servicing cost from low national savings, economy contracts and therefore future levels of consumption fall because of insufficient funds.

So as a result of low national saving, future levels of consumption and investment spending fall because of insuffiecient funds.

I think i sorta get it now. Thanks

 

[i-color]

hehe yeah that sounds about right.