Suppose that a country has a depreciation rate of 3 percent, a national savings rate of 6 percent, and growth in net exports of -4 percent. Assume that the savings are efficiently transformed into investment, what is the investment rate for this country?
A) 2 percent
B) 10 percent
C) -1 percent
D) 5 percent

Question

Quizplus · Accepted Answer

The investment rate is calculated as the national savings rate minus the depreciation rate plus the growth in net exports rate.

Investment rate = national savings rate - depreciation rate + growth in net exports rate 
Investment rate = 6% - 3% - 4% 
Investment rate = -1%

Since the growth in net exports is negative, it implies that the country is importing more than it is exporting. This means that there is a net outflow of funds from the country, which reduces the amount of funds available for investment.

Therefore, the investment rate for this country is negative (-1%), implying that the country is not investing enough to replace the capital lost due to depreciation. However, since the prompt states that savings are efficiently transformed into investment, this negative investment rate suggests that the country needs to increase its national savings rate and/or reduce its imports to increase its domestic investment.

Option B is incorrect because the investment rate is actually negative (not positive) as calculated above.

Suppose That a Country Has a Depreciation Rate of 3