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22 June 2011

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John Ross

Glen,
The answer regarding China is to remember that the only potential source of saving is not simply households but also companies and governments. The core source of the very high savings level in China is the very high level of company profitability and the lack of a significant budget deficit (2.5% of GDP last year). So household saving is higher than in Europe or the US but the biggest difference comes from the combined effects of the company and government sectors.

Glen

Very interesting piece of analysis, John.

One can also take the argument from the Keynesian argument that the marginal propensity of consumption declines as societies become richer or indeed less equal in wealth distribution. (The rich save more than the poor as a percentage of their income, so the amount of saving in the economy rises as GDP rises.

If aggregate demand is to be consistent with full employment in these circumstances then investment as a percentage of aggregate demand must increase as GDP rises.

But the puzzle for China is this: it is not a rich country by any means so one would expect ts level of consumption to be higher than it is now. and given the much higher levels of wealth in the US and Europe why is the amount of consumption in GDP much higher in those economies? What explains the very low marginal propensity to consume in China? why is it not true in say India? Is it Government policy for example? Is it the ageing factor?

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John Ross

  • Is Senior Fellow at Chongyang Institute for Financial Studies, Renmin University of China

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