Savings or Consumption?

I came across this great video about savings and consumption today. This video highlights the importance of savings in the economy, despite the common conception that consumption may be a more important component of the economy. I was told in school that consumption was roughly 70% of the economy. Indeed, in Keynes' view, increasing consumption will increase growth via higher spending. Remember that AD = C + I + G + (X-I), where AD = aggregate demand, C = consumption, I = investment, G = government spending, X = exports, I = imports. If consumption increases, the left hand side of the equation, AD, increases. An increase in AD will increase economic growth, so the argument goes. 

But this 3 minute video actually argues the opposite. Savings are more important for the economy because it allows investment to grow and this helps increase production. In exams, the examiners are looking for a balanced argument. These alternative views are perfect to help you gain extra marks. 

UK and Foreign Capital

Last week it was reported that 53.2% of shares of UK-listed companies are foreign owned. This post sees globalisation rearing its head again, discussing further impacts of globalisation on the UK economy.

More than half of all shares in UK-listed companies are owned by foreigners which shows the UK’s greater integration with the global economy. One reason for this is that people in emerging economies such as China and India are investing more abroad as they become wealthier. Another reason for this is that foreigners tend to look for investment opportunities in other countries, particularly rich countries, as a safe place to put their money, thus their attraction to the UK.

An increase in foreign capital coming to the UK can help us reduce our current account deficit. Investment is a component of aggregate demand, and so increasing investment can increase demand and help reduce the effects of the financial crisis.

(Evaluation point: it could, however, be showing that many UK-listed companies are foreign and conduct little business in the UK)

One negative consequence of foreigners owning shares in UK companies is that board level decisions are more difficult to make because directors are scattered all around the world. This point is key as it links micro with macro, something examiners relish to find in top exam answers.