Question

On average, households in China save 40% of their annual income each year, whereas households in the United States save less than 5%. Production possibilities are growing at roughly 9% annually in China and 3.5% in the US. Use graphical analysis of "present goods" versus "future goods" to explain the differences in growth rates.

Answer 1

According to economic theory, economic growth depends largely on the rate of investment in the economy, which in turn depends on the rate of saving, because all investments must be financed by previous savings.

China's average GDP growth is much higher than American GDP growth, and while there are many other reasons for this, the difference in the rate of savings of household incomes in the two countries are part of the explanation.

Chinese households save a much larger percentage of their income than American households, meaning that they rate of growth of loanable funds for investments in China is higher than in the U.S., which boosts Chinese economic growth.