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Worksheet on Consumption, Investment and Growth (Student Version)

• Consumption, Investment and Growth Worksheet
• Tutor notes

This worksheet looks at consumption and investment, and considers how important they are to Economic Growth. Read on to find out more!

If you wish to print this worksheet for use in the classroom, then it is recommended that it is printed using the landscape paper option/layout.

Step 1 Robinson Crusoe

Robinson Crusoe is washed up on a desert island, as the story goes. As he's read the script, he knows that he isn't going to be rescued in the near future and so he's got to plan for the future. Coincidentally he also happens to have been washed up with 20 bags of wheat (which aren't waterlogged!!). However, this is all he has and so he faces the same choices as any society. His resources are scarce, but his wants are unlimited - he's hungry!

Let's give him a simple choice - he either eats or plants his bags of wheat. If he eats them they're gone, but for each bag he plants he gets two bags the next year. In the table below, fill in what will happen if he chooses the various options 1 - 3:-

** In the total column, fill in the number of bags he has available at the start of the year.

Which strategy is best :
a) in the short-term?

b) in the long-term?

Why?

Step 2 Economic growth

The number of bags Robinson Crusoe has each year is his total production. It is therefore equivalent to his GDP. The change in GDP each year is the level of Economic Growth, and so the change in the number of bags Robinson Crusoe has each year is his level of economic growth.

What is Robinson Crusoe's economic growth for each of the 3 options.

Option 1 ____________________________

Option 2 ____________________________

Option 3 ____________________________

If you want to check the answers to Step 1 then download this Robinson Crusoe Spreadsheet

Step 3 Production Possibility Frontier

So Robinson Crusoe has a choice between CONSUMPTION & INVESTMENT. Consumption - he eats them now & investment - he plants them. From this fill in the table below:-

We can also illustrate this choice with Production Possibility Frontiers. A production possibility frontier shows the alternatives an economy faces. If production of one item is increased, there will be an Opportunity Cost. This is also true of the choice between consumption and investment. If an economy increases investment , they will have to give up some current consumption. Investment can therefore be thought of as foregone consumption. However, as we have seen with Robinson Crusoe this foregone current consumption should lead to greater future consumption.

Below is a set of axes for a Production Possibility Frontiers. Draw a production possibility frontier and then draw in the position on the PPF of each of Robinson Crusoe's options above.

So what positions do various real countries choose?

To establish this you will need to carry out each of the steps below:-

• Choose three European countries and two others
• Click on the link below to go to Penn World Data tables
• Get figures for consumption & investment as a % of GDP for a particular year
• Draw a Production Possibility Frontier on the axes below
• Plot the point that each country is at for the year you have chosen

Penn World Data Tables (http://www.bized.co.uk/dataserv/penndata/pennhome.htm)

Step 4 Consumption / Investment & Economic Growth

The next stage is now to consider the impact of the level of consumption & investment on economic growth. We have already seen that Robinson Crusoe had a better time in the long-term the more he planted. However, to do that he had to sacrifice current consumption and wait until the extra grew. This was the opportunity cost.

So we expect countries with higher levels of investment, to have higher levels of economic growth. Is this true in practice?

To test this we could take figures for investment and economic growth for a year and plot them on a graph. How valid would this approach be?

Since these issues affect economies over the long-term we therefore need to look at investment and growth levels over a period of time. If we consider the average figures over a decade we may be able to draw better conclusions. To start this process fill in the table below with countries of your choice (up to 4 countries):-

Go to the Penn World Data tables (http://www.bized.co.uk/dataserv/penndata/pennhome.htm) for the data you need for the table. Make sure you note down the information you need before you click!

Hint: You may find it easier to download the data you require as comma-separated text from the Penn World Data tables, and put it into a spreadsheet to perform the above calculations. Download a spreadsheet that is ready formatted like the table above and with the formulae in ready - Investment / Economic Growth spreadsheet

Step 5 Analysis / Conclusions

The easiest way to analyse the data above may be to graph the final figures to compare the countries. The graph should have average investment on the horizontal axis and average growth on the vertical axis. Each country can then be plotted at the appropriate point.

What conclusions can you draw from your graph?

If the data does not give a clear conclusion - perhaps you could try another six countries?

Finally - if you were Robinson Crusoe would you take option 3 and go out with a binge relying on being rescued or would you take the long-term, considered, forward-thinking approach - option 2 and wait for your binge in the future?!!!!!?