Author Question: Convergence means that A) if poor countries grow fast, then fast growing countries are poor. B) ... (Read 158 times)

Metfan725 · **on:** Jun 30, 2018

Convergence means that

A) if poor countries grow fast, then fast growing countries are poor.
B) all countries grow at the same rate.
C) all countries tend towards the same per capita income.
D) the savings rate is positively related to per capita income.

Question 2

Why is it important, for an open economy, that investment not be consistently higher than saving?

What will be an ideal response?

reelove4eva · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

C

Answer to Question 2

When investment is higher than saving, the difference is a net capital inflow. The extra investment that is financed by foreigners is an addition to their wealth, rather than an increase in the wealth of domestic citizens. The income from such investment must be paid to the foreign owners, thus is not available to contribute to domestic income and saving. The source of the capital inflow is a continual excess of imports over exports (negative trade balance). Imports are being financed through the sale of assets to foreigners. It is not so much investment but consumption that is unsustainably high; saving is unsustainably low.