Several developing countries are running large current account surpluses (representing an excess of savings over investment) and rapid growth has led to high saving rates as people save a large fraction of additional income. In India, the saving rate has risen from 23% a decade ago to 33% today. China’s saving rate is 55%. The glut of saving in Asia is being put into U.S. bonds. When a poor country buys U.S. bonds, it is in effect lending to the United States.
a. Graphically illustrate and explain the impact of the “glut of savings” on the real interest rate and the quantity of loanable funds.
b. How do the high saving rates in Asia impact investment in the United States?