Macroeconomics

An Increase in the Saving Rate

An increase in the saving rate s

implies that the amount of investment for any given capital stock is

higher. It therefore shifts the saving function upward. At the initial

steady state k

1

*, investment now exceeds depreciation. The capital

stock rises until the economy reaches a new steady state k

2

* with more

capital and output.

F I G U R E

7 - 5

dk

s

2

f(k)

s

1

f(k)

k*

2

k*

1

Investment

and depreciation 

Capital

per worker, k

2. ... causing 

the capital

stock to grow 

toward a new 

steady state. 

1. An increase 

in the saving 

rate raises 

investment, ...

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202

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P A R T   I I I

Growth Theory: The Economy in the Very Long Run

Saving and Investment Around the World

We started this chapter with an important question: Why are some countries so

rich while others are mired in poverty? Our analysis has taken us a step closer to

the answer. According to the Solow model, if a nation devotes a large fraction of

its income to saving and investment, it will have a high steady-state capital stock

and a high level of income. If a nation saves and invests only a small fraction of

its income, its steady-state capital and income will be low.

Let’s now look at some data to see if this theoretical result in fact helps explain

the large international variation in standards of living. Figure 7-6 is a scatterplot

of data from 96 countries. (The figure includes most of the world’s economies.

It excludes major oil-producing countries and countries that were communist

during much of this period, because their experiences are explained by their spe-

CASE STUDY