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Australia should save more, says prominent Australia economist

August 4, 2010

http://news.smh.com.au/breaking-news-business/australia-should-save-more-says-garnaut-20100729-10xhp.html

“Australia should save more as a nation so it’s better positioned to deal with any financial difficulties if economic growth stagnates in China, India and Indonesia, eminent economist Professor Ross Garnaut says.”

Professor Garnaut, a prominent climate adviser to the Australian government, talked to reporters after addressing an American Chamber of Commerce in Australia luncheon.  His main theme was that the world economy has changed and continues to change dramatically, being affected by, among other things, the worldwide resources boom and the Global Financial Crisis (GFC).  Australia has benefited from the former and managed to be one the luckier developed world countries since it has avoided recession during the GFC.

Whatever is going on in the world, however, national savings is always to be encouraged.   “We should be running our own economy mindful that although the long-term outlook is very good for those big developing countries, there will be bumps in the road…That’s why for the last five years on average, I would have liked us to be saving a bit more.”

While savings is always beneficial, there are times when one should be spending more than saving.  “Not in the depth of a crisis (the global financial crisis), it was appropriate to spend a lot in the depth of a crisis.”  But overall, Garnaut would “like us to be saving a bit more.”

  1. What does Professor Garnaut mean when he speaks about ‘savings’?  Use circular flow to explain.
  2. How might a ‘bit more savings’ shift Australia’s PPF outward?
  3. Why is it OK for Australia to save less during the GFC but better for it to save more, on average, in more normal times?
  4. Why is developing country demand for resources important to the Australian economy?  How does this affect both Australia’s circular flow and PPF?
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