Download the App!
Get 24/7 study help with the Numerade app for iOS and Android! Enter your email for an invite.
Question
Answered step-by-step
Suppose Americans decide to save more of their incomes. If banks lend this extra saving to businesses, which use the funds to build new factories, how might this lead to faster growth in productivity? Who do you suppose benefits from the higher productivity? Is society getting a free lunch?
Video Answer
Solved by verified expert
This problem has been solved!
Try Numerade free for 7 days
Like
Report
Official textbook answer
Video by Kaylee Mcclellan
Numerade Educator
This textbook answer is only visible when subscribed! Please subscribe to view the answer
03:50
Yi Chun Lin
No Related Courses
Chapter 1
Ten Principles of Economics
How Markets Work
Introduction
0:00
Suppose Americans decide t…
03:21
01:49
01:13
Suppose Canadians decide t…
01:52
Suppose americans decide t…
02:41
How do gains in labor prod…
03:09
Why does productivity grow…
03:59
Why does productivity gro…
01:33
If firms become more optim…
00:26
Suppose that workers invol…
01:35
If households decide to sa…
discussing productivity growth. We're gonna take a look at the production function. In order to analyze this example, we're told that Americans begin to save more banks, lend these savings to businesses who then use these funds to build factories. And we'd like to know how this might result in faster productivity growth and who might benefit from it. So to do that, I sketch for us this production function, because it's the best way I think to explain it. So we see that this curve here, this is our production, this growth in production. So and it's a factor of it. Input and output and input, we know is made up of capital and labor. So it's really our capital per labor hours, and our output is measured in GDP. So that's why and so, essentially, what we're saying here is that why our GDP is a function of capital and labor, right? That makes sense. So what we're told here, because Americans are saving more, which allows banks to lend this capital to businesses. We're seeing an increase in capital for these businesses. So as capital increases, we would expect our input to increase right. So if capital goes up, we're going to get a larger number in our input, which means our output is also going to increase. So what you can see here is if our capital per labor ratio started here, it was fairly little. But let's suppose now we have more capital with, which allows us to jump up to here. All of a sudden, what we're seeing specifically is that our output has increased, so it makes sense to see this faster productivity growth as a result of this increase in capital. And as for who benefits from this, it's really going to be just about everybody. This increase in saving and productivity. It's going to benefit both the Americans who are choosing to save and these businesses who are investing the funds into their factories. What we see is that Americans are initially reducing their consumption so these Americans consumption initially decreases because they're choosing to save that money. So for a period of time, there going to experience lower utility as a result of consumption. But over time, as this productivity is able to increase like we said, consumption will be able to increase again, so over time it makes it worth it, So not only will Americans eventually be able to consume more as a result of this higher production rate, but the employees of these factories these workers, because they are able to produce more they're more productive, in which case they're going to see an increase in their benefits as well. Employees produce more, their wages go up, and as a result, they're better off. And same thing with these factory owners. Because these factory owners are going to be able to increase the productivity of their workers and their manufacturing processes. They're going to be able to earn higher revenues and higher profits, most likely so these factory owners are also going to benefit from this as they see an increase in their profits.
View More Answers From This Book
Find Another Textbook
