Question

Why is there a trade-off between the amount of consumption that people can enjoy today and the amount of consumption that they can enjoy in the future? Why can't people enjoy more of both? How does saving relate to investment and thus to economic growth? What role do banks and other financial institutions play in aiding the growth process?

Answer 1

Answer: Please refer to Explanation.

Explanation:

There is a trade-off between the amount of consumption that people can enjoy today and the amount of consumption that they can enjoy in the future because of the concept of SCARCITY OF RESOURCES. We do not have unlimited resources and so have to make tradeoffs to enjoy the limited resources that we have.

If people spend more today then they will have less to buy in the future and if they spend less they will have more to buy in future.

Investment is essentially the National savings. In a closed Economy for instance where there are no imports and exports, the GDP equation will look like this,

GDP = C + G + I

Where C is consumption

G is Government Spending (government consumption)

I is investment.

Notice that if the equation was flipped to make I the subject we would have,

I = GDP - C - G

Therefore I is savings.

The more savings a country has, the more money it has to invest which leads to more factories and businesses opening which leads to Economic growth.

Banks are very important because they act as the Middle man to get the Investment from the savers to people who need it. With the experience they have, they can tell which opportunities are good and which can be troublesome and so will help the economy by channelling investments to the MOST DISCERNING of Investments.