July 24, 2013

Wealth, Savings, and Investment

Most of the economists are familiar with the growth model, AK Model. This model explains how economic growth can be achieved by saving and investing. How can this sounding complex model, yet simple, can be applied in our daily life and can eventually transform our society?

The model simply means that in order to increase your wealth (GDP) you must save and invest. That is, your savings can be used to finance your investment or business (like stocks, bonds, or a simple hotdog stand). If the growth of your investment is greater than your savings then your wealth will grow (assuming savings rate is equal to inflation rate).

The model highlights the importance of savings in building investment. Hope this will encourage everyone to save then invest afterwards. Cheers!

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