ECO 304L Chapter Notes - Chapter Unit 3: Ch 9-12, 16: Capital Accumulation, Time Preference, Subsistence Agriculture
7 Oct 2017
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Role of saving and resources available for capital accumulation: a simple story to help understand how saving helps the economy, think about a subsistence agriculture tribe that grows corn. The tribe"s standard of living is based on the amount of corn consumption. For a single period, the satisfaction may be the highest if they consumed all the corn. However, saving seeds to plant for next year will raise long-run corn consumption: saving the seeds for next year"s planting is the analog of investment in modern economies. In this simple case, the decision to save (not to eat the corn) leads resources that are not consumed to be invested (corn put it in storage for next year"s planting). The result is higher y* in the future: certainly, this is a very simple and, for modern economies, unrealistic example. But this simple abstraction does illuminate the relationship between saving and investment.
