Showing posts with the label long term growth

Saving or Spending for Economic Growth?

Neoclassical growth theory states that higher saving rates can increase long-term wealth while Keynesian economics indicates that higher saving rates can lower consumption. Yun-Kwong Kwok in his paper creates a bridge between the two theories by studying the links of the Solow diagram (neoclassical) and IS-LM curves (Keynesian).   These two concepts are often covered separately in college because they do not easily mesh into a single framework.   People are left wondering if we should save or spend? The first concept to understand is that the neoclassical model is a long-term model while the Keynesian model is more short-term.   One focuses on a longer-term trend while another focuses more on immediate needs. This is one reason why decision-makers who are looking for immediate results often use the Keynesian model.  In the long-run Solow model, the total output Y of an economy is produced by capital K and labor L: Y=F(K,L).   Capital accumulates through net investment. Out