Escaping the low-investment trap
While interest rates have declined dramatically recently, private investment has remained stagnant. Why and how do we get out of this trap? Economic Times February 25, 2004 While interest rates have declined dramatically recently, private investment has remained stagnant. Why and how do we get out of this trap? This is a somewhat technical question but can be understood with a little patience. The starting point for the answer is the powerful savings-investment identity, which says that investment in an economy equals the savings available to it. In an open economy, there are three sources of savings: private, government and foreign. Likewise, there are two broad categories of investment: private and government. Measuring all variables as a proportion of GDP and denoting government and private investments by Ig and Ip and government, private and foreign savings by Sg, Sp and Sf, respectively, the identity can be written as Ig + Ip = Sg + Sp + Sf. Government investment includes investment in infrastructure, health and education. Private investment refers to investment in plant, machinery and buildings by firms. Private savings…
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