Part ThreeAnnouncementsChapter 10Chapter 10: 0utlineLearning Objectives-Chapter 10Capital FundamentalismFig. 10.1: Income and SavingFig. 10.2: Gross domestic saving(%GDPTable 10.2: Country Saving dataKey Component of SavingFig. 10.3: Key components of savingsHousehold Saving and ConsumptionTheories of Household Saving Behavior4 Alternative theories of Saving behaviorFig. 10.4: Keynesian Absolute Consumption HypothesisKeynesian Absolute Income HypothesisFig. 10.5: Consumption and Savings in the Short-run and Long-runConsumption & Saving in the Short run and long term with rising income over timeThe Relative Income Hyothesis –Dusenberry hypothesisFig. 10.6: Age Dependency RatioDependency RatioFig. 10.7: Government Revenue, Consumption, SavingTable 10.3: Capital Flows to Developing CountriesTable 10.4: Capital flows in LDC by income levelEnd Chapter 10PART THREESaving, Investment,and Capital FlowsAnnouncements•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: [email protected] 10Saving andResourceMobilizationNorton Media LibraryDwight H. PerkinsSteven RadeletDavid L. LindauerChapter 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 SavingLearning 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 savingCapital 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 worldKey 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 + equitySee Figure 10.3Household Saving and ConsumptionTwo main reasons of savings by households:1.To Generate future income2. To Protect against unexpected fall in income. “Precautionary motive”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 income4 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+sYdKeynesian 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 positiveConsumption & 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.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 10.4Dependency 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?This concludes the Norton Media LibrarySlide Set for Chapter 10W. W. Norton & CompanyIndependent and Employee-OwnedEconomics ofDevelopmentSIXTH EDITIONByDwight H. Perkins Steven RadeletDavid L.