Some analysts claim that the economy is subject to a “paradox of thrift.” That is, increases in saving will cause consumption and GDP to fall. In support, they point to the fact that consumer spending is more than ⅔ of GDP.(a) Does the Solow model (described in Chapter 28 of Cowen and Tabarrok), show the paradox of thrift? Explain.(b) What about the real world? Do the data in Figure 28.8 below suggest a paradox of thrift? Explain. FIGURE 28.8GDP per capita, realU.S. dollars (2000)S40,000• United States30,000• SingaporeFranceJapan20,00010,000SBrazilNigeriaIndiaj102040Averagu investmunt rate (%),1960-199530GDP per Capita Is Higher in Countries with Higher Investment RatesData from: Penn World Tables and Bemanke, Ben S., and Refet S. Gurkaynak. 2001. Is growthexogenous? Taking Mankiw, Romer and Weil Seriously. NBER Working Peper 8365, National Bureauof Economic Research, Inc.

The Paradox of Thrift states that if there is an increase in the rate of savings, then the…

Answered: Some analysts claim that the economy is…

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter9: Aggregate Demand

Section: Chapter Questions

Problem 3.7P

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Some analysts claim that the economy is subject to a “paradox of thrift.” That is, increases in saving will cause consumption and GDP to fall. In support, they point to the fact that consumer spending is more than ⅔ of GDP.

(a) Does the Solow model (described in Chapter 28 of Cowen and Tabarrok), show the paradox of thrift? Explain.

(b) What about the real world? Do the data in Figure 28.8 below suggest a paradox of thrift? Explain.

FIGURE 28.8
GDP per capita, real
U.S. dollars (2000)
S40,000
• United States
30,000
• Singapore
France
Japan
20,000
10,000
SBrazil
Nigeria
Indiaj
10
20
40
Averagu investmunt rate (%),
1960-1995
30
GDP per Capita Is Higher in Countries with Higher Investment Rates
Data from: Penn World Tables and Bemanke, Ben S., and Refet S. Gurkaynak. 2001. Is growth
exogenous? Taking Mankiw, Romer and Weil Seriously. NBER Working Peper 8365, National Bureau
of Economic Research, Inc.

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