A tutor version of a worksheet using the example of Robinson Crusoe to explore how consumption, investment and growth are important factors for economic growth.

Worksheet on Consumption, Investment and Growth (Tutor Version)

This first section is just to get students thinking about what is meant by consumption and investment in a simple context. They need to fill in the table on the basis of the assumptions below. He gets two bags the next year for every one he plants. One of the downloadable spreadsheets in Step 2 has the answers ready done, and they are filled in below as well:-

Year	1.Eats half & plants half			2.Eats a 1/4 & plants 3/4			3.Eats 3/4 & plants 1/4
	EATS	PLANTS	TOTAL **	EATS	PLANTS	TOTAL **	EATS	PLANTS	TOTAL **
1	10	10	20	5	15	30	15	5	10
2	10	10	20	7.5	22.5	45	7.5	2.5	5
3	10	10	20	11.25	33.75	67.5	3.75	1.25	2.5
4	10	10	20	16.9	50.6	101.2	1.9	0.6	1.2
5	10	10	20	25.3	75.9	151.8	0.9	0.3	0.6

** 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? Option 3 - immediate consumption, little investment

b) in the long-term? Option 2 - foregone present consumption, but higher future consumption thanks to higher investment

 

Step 2 Economic growth

Step 2 can be done either by downloading a spreadsheet or simply on paper. The first spreadsheet has all the figures and formulae in, the second is blank to be filled in - Robinson Crusoe spreadsheet (complete), Robinson Crusoe spreadsheet (blank). These figures can then be plotted on a graph for the five years to show the level of economic growth Robinson Crusoe has.

 

Step 3 Production Possibility Frontier

This step is to stress this choice between consumption and investment further, and illustrate it by using production possibility frontiers. The answers for the first table are:-

OPTION NO.	CONSUMPTION High or Low?	INVESTMENT High or Low?	ECONOMIC GROWTH High or Low?
1	Reasonable	Reasonable	None
2	Low	High	High
3	High	Low	Low (negative)

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.

It may also be worth stressing at this point how the effect of the higher levels of investment over time will be to shift the PPF outwards.

Next students will need to connect to get actual figures for consumption and investment levels from the Penn World Data Tables (http://www.bized.co.uk/dataserv/penndata/pennhome.htm), and use them to do the same on another PPF. You could either direct their choice of countries or allow them the flexibility to choose their own. Either option should be able to lead on to a discussion on the relative stages of development of countries, and possible reasons for this.

 

Step 4 Consumption / Investment & Economic Growth

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?

This approach ignores the long-term effect that investment has on an economy

This next stage is possibly the most time-consuming, but could form the basis for an excellent project or portfolio piece of work. Students need to gather data to fill in the table below from the Penn World Data tables (http://www.bized.co.uk/dataserv/penndata/pennhome.htm), and then calculate the average levels of investment and growth for the decade they have chosen. If this is being done as a project a comparison could perhaps be done over several decades. There is once again a downloadable spreadsheet available, that will do all this and has the formulae already included.

Country		Year 1	Y-2	Y-3	Y-4	Y-5	Y-6	Y-7	Y-8	Y-9	Y-10
1...	Investment
	Average investment	-	-	-	-	-	-	-	-	-
	GDP
	Economic growth	-
	Average economic growth	-	-	-	-	-	-	-	-	-
2...	Investment
	Average investment	-	-	-	-	-	-	-	-	-
	GDP
	Economic growth	-
	Average economic growth	-	-	-	-	-	-	-	-	-
3...	Investment
	Average investment	-	-	-	-	-	-	-	-	-
	GDP
	Economic growth	-
	Average economic growth	-	-	-	-	-	-	-	-	-
4...	Investment
	Average investment	-	-	-	-	-	-	-	-	-
	GDP
	Economic growth	-
	Average economic growth	-	-	-	-	-	-	-	-	-

Click on this link to get to Penn World Data tables (http://www.bized.co.uk/dataserv/penndata/pennhome.htm) for the data you need for the table. Stress to students that they should prepare all they need in advance and note the figures down or save them back to their machine to use on-line time as efficiently as possible. Any calculations should be done off-line!

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

Students should now aim to graph their results. The use of a spreadsheet will make this process much simpler. The graph should have average investment on the horizontal axis and average growth on the vertical axis.

They should now be able to draw conclusions about the impact of investment on growth, and hopefully their choice of countries will enable them to see a higher level of growth from countries with higher levels of investment. The inclusion of Japan, Germany and the UK should help to draw the right (!) conclusion.