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Part Three

Part Three. PART THREE. Saving, Investment, and Capital Flows. Announcements. October 16-Thursday: No Class – Traveling to Sweden & Africa/Ethiopia to attend conferences Will return October 26 Sunday late Afternoon October 30, Thursday,Test #3 (Chapters 10,11,12,13 )

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Part Three

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  1. Part Three PART THREE Saving, Investment, and Capital Flows

  2. Announcements • October 16-Thursday: No Class – Traveling to Sweden & Africa/Ethiopia to attend conferences • Will return October 26 Sunday late Afternoon • October 30, Thursday,Test #3 (Chapters 10,11,12,13) • Tuesday & Thursday -October 21 & 23 classes will be covered by Dr. Happy Siphambe. • He will cover chapters 11, 12, & may be 13? • Midterm grades are posted. Check them. • If you have questions contact me by e-mail at: sisay.asefa@gmail.com

  3. Chapter 10 Norton Media Library Chapter 10 Saving and Resource Mobilization Dwight H. Perkins Steven Radelet David L. Lindauer

  4. Chapter 10: 0utline • Saving and Investment around the World • A Saving Taxonomy • Household Saving and Consumption • The Keynesian Absolute-Income Hypothesis • The Relative-Income Hypothesis • The Permanent-Income Hypothesis • The Life-Cycle Hypothesis • Growth and Saving: Which Causes Which? • Other Determinants of Private Saving • Corporate Saving • Government Saving • Foreign Saving

  5. Learning Objectives-Chapter 10 • The record of saving and investment in developing countries. • The relationship among tax revenues, public sector expenditure, and government saving. • The observed patterns of household saving behavior and the theories of household saving. • The importance of foreign private saving. • The relationship between growth and savings • The different impacts of corporate saving, government saving, and foreign saving

  6. Capital Fundamentalism • The development strategy of the 1950s & 60s was “Capital Fundamentalism” • Related to theories of Economic Growth such as Harrod-Domar Model, Lewis Model • Data for Savings, Investment for countries table 10.1 • Patterns of Savings Around the world

  7. Fig. 10.1: Income and Saving

  8. Fig. 10.2: Gross domestic saving(%GDP

  9. Table 10.2: Country Saving data

  10. Key Component of Saving • Interrelationship of key components of savings • Total saving= Domestic + Foreign Saving • Domestic =Government + Private saving • Foreign Saving= Official + Private • Private = Household + Corporate • Official = Grants + Loans • Private= Debt + equity See Figure 10.3

  11. Fig. 10.3: Key components of savings

  12. Household Saving and Consumption Two main reasons of savings by households: 1.To Generate future income 2. To Protect against unexpected fall in income. “Precautionary motive”

  13. Theories of Household Saving Behavior • Theories that explain 3 observed patterns • 1. within a particular country at a given time • 2. Within particular country over time • 3. Across countries savings vary with no clear relationship to income

  14. 4 Alternative theories of Saving behavior • 1. Keynesian Absolute-Income Hypothesis • Household saving= f( disposable income) • C= c* + (1-s) Yd :where C= private consumption, s= marginal propensity to save, and Yd= disposable income • If s=0.15, c*=autonomous consumption • If S=Yd then S= -c+sYd

  15. Fig. 10.4: Keynesian Absolute Consumption Hypothesis

  16. Keynesian Absolute Income Hypothesis • This idea is shown by Figure 10.4 • To the left of A, consumption exceeds disposable income and saving is negative • To the right of point A, Saving is positive

  17. Fig. 10.5: Consumption and Savings in the Short-run and Long-run

  18. Consumption & Saving in the Short run and long term with rising income over time • Figure 10.5 shows the following • 45 degree line shows all points where consumption + saving = Income • 4 Short run functions for each year 1990, 2000, 2010, and 2020 are show what people would have spent at various levels in those years • The flatness of the these curves shows consumes do not change consumption habits in the short-run • In the long consumption path is more less flatter or more steper.

  19. The Relative Income Hyothesis –Dusenberry hypothesis • The Dusenbery hypothesis is a form of relative income hypothesis based on the idea consumption and saving depend not only on current income but also on previous level of income. • Cd1= (c +bCh) + (1-s) Yd1 • Cd1, Yd1= consumption & income in period 1 • Ch is previous high consumption level • b= is constant regardless of income. The basic idea is that consumption in the current economy tends to rachet upward overtime as income grows. • The relationships between Absolute income hypothesis and that of Relative hypothesis is shown in figure 10.4

  20. Fig. 10.6: Age Dependency Ratio

  21. Dependency Ratio • Dependency Ratio from young population 15 yeas or less • What is the Impact of dependency ratio on Savings & Investment? • Dependency Ration from Older (retired) non-working Population over 65 • Where does the main dependency ratio come from for ICs and LIC’s? for Africa?

  22. Fig. 10.7: Government Revenue, Consumption, Saving

  23. Table 10.3: Capital Flows to Developing Countries

  24. Table 10.4: Capital flows in LDC by income level

  25. End Chapter 10 W. W. Norton & Company Independent and Employee-Owned This concludes the Norton Media LibrarySlide Set for Chapter 10 Economics ofDevelopmentSIXTH EDITION By Dwight H. Perkins Steven Radelet David L. Lindauer

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