E+D Economies - Low Savings

Question 1

Constrains because…

Answer 1

• Low saving due to low incomes and low access to banks
• Banks could not give out loans
• Savings gap - gap between a banks savings and the money firms went to borrow from the bank
• Investment stays low - AD shifts in - decrease real GDP - dedceae economic growth
• ^^ LRAS shifts in too
• Real GDP low - stay poor - incomes stay low - savings stay low - savings gap increases
• ^^ keep investment low - vicious cycle
• Low incomes = low savings = low investment = low growth = ^^
• Firms low profit - low corp tax rev - low gov spending - limit development

Question 2

Fix

Answer 2

• Microfinance - where small loans are provided to tiny business who otherwise would have had no access &laquo_space;Grameen bank did this in 1983
• When people use microfinance loans to invest into their small businesses, theirproductivityincreases. This reduces their costs and means they can charge lowerpriceswhich makes them morecompetitivemeaning they will earn more inincome.
• ^^ higher incomes = more saving = more money to lend from banks = more investment

Question 3

Eval

Answer 3

• They charge very high interest rates - some up to 100%
• ^^ firms may not make that much money as they will have to give up so much paying back the loan
• With no extra income, Mandy won’t be able tosavemoney in the bank. This means that there will still be a savingsgapand that firms won’t be able toborrowmore money. As a result,investmentwill stay low. Since investment is a component of aggregatedemand, this means that economicgrowth or developmentwill stay limited.
• ^^ They may even have to close their businesses and become unemployed
• ^^ bankruptcy will only increase the savings gap and constrain growth and development even more

Question 4

Example

Answer 4

Extremely low savings in Bangladesh - on average less than $5 per person