Please explain how does greater saving lead to greater investment in poor economies and why does this not happen in developed economies???
Dear student,
As correctly posted by you in the picture, greater savings imply greater investment in poor economies because there is more scope for production and investment. Also, in such economics, the AS is much less than AD. So, in poor countries, if people save, this means they are consuming less, which further implies that AD falls and the gap between AS and AD reduces, leading to betterment of the country.
On the other hand, in developed countries, the AS is much more than AD, as everything is already developed. Thus, in such cases, if people save more, then this implies that they are consuming less, which further reduces AD. As a result the gap between AS and AD widens, and affects the country adversely.
As correctly posted by you in the picture, greater savings imply greater investment in poor economies because there is more scope for production and investment. Also, in such economics, the AS is much less than AD. So, in poor countries, if people save, this means they are consuming less, which further implies that AD falls and the gap between AS and AD reduces, leading to betterment of the country.
On the other hand, in developed countries, the AS is much more than AD, as everything is already developed. Thus, in such cases, if people save more, then this implies that they are consuming less, which further reduces AD. As a result the gap between AS and AD widens, and affects the country adversely.