Limit 2: savings gap

Question 1

Limit 2: savings gap
Influence on economic growth:

Answer 1

Influence on economic growth:
Savings ratio: percentage of income saved
Low savings result in a lack of loanable funds in banks, lowering investment, lowering AD. The captial stock is lower, resulting in lower LRAS, limiting diversification.
Harrod Domar model: growth is dependent on savings and efficiency of captial (eval)
Capital output ratio: the amount of captial needed to produce one unit of output.
High capital output ratio – a large amount of capital needed to produce one unit of output
Economic growth=(savings ratio)/(captial output ratio)
High savings ratio with low capital output ratio leads to high economic growth
Low
leads to low economic growth

Question 2

Determinants of savings ratio

Answer 2

Level of income
Low
Access to banking
Low (technology)

Question 3

Determinants of capital output ratio

Answer 3

Quality of infrastructure (e.g. electricity and road networks)

Level of profits and therefore capital investment
Outdated

Education
Prevent erros and to fix them

Question 4

• Other sources of loanable funds which may ‘fill’ savings gaps allowing investment

Answer 4

a. Aid
b. FDI
c. Export revenue

Question 5

Limit 3: foreign currency gap

causes

Answer 5

• earnings from exports are relatively low,
• import prices (e.g. world oil prices) have increased
• large international debts on terms that they cannot afford to repay; for example, if interest rates increase.

Question 6

foreign currency gap

Answer 6

Results:
- Difficulty in importing industrial goods and factors of production, limiting growth
- Firms struggle to invest
- FDI decreases