Two–Period Model. Consumption & Savings. Economics Article Critique

Two –Period Model- Consumption & Savings
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The article looks into the savings’ habit of the Chinese and Americans, with the Chinese saving larger shares of their income compared to the west. This partly explains the availability of capital that powered the country’s economy in the past few decades (Areddy, 2019). The government was able to tap into savings to build and improve infrastructure, but consumer spending remained low, but after 40 years of huge savings, the Chinese are spending less, and borrowing more (Areddy, 2019). As the middle-class has been growing in China, the people’s spending habits have become similar to American consumers. The two-period model is relevant to study the phenomena since consumers respond differently to changes in income and interest rates.
The graph shows effects of interest rate on the quantity of money spent
Spending by Chinese households has decreased in the past decade, and has occurred when there has been reduced savings. On the other hand, US consumption levels are still high and saving rates are low and consumer expenditure is one major driver of the US economy. Reducing current consumption allows one to save for the future and have more to consume later on, and as Chinese households borrow more to spend there have less to spend in the future. This is consistent with the two-period model where high consumption in the current period results in sacrificing future consumption.
The figure below show income consumption curve
Reducing current consumption allows one to save for the future and have more to consume later on. Borrowing in the current period results in high consumption in the current period and sacrificing future consumption. China’s savings rate have been among the highest in the world, and this pool of capital partly fueled the country’s growth and allowed china to buy more than $1 trillion in U.S. Treasury bonds (Areddy, 2019). However, there has been reversal in the savings rate where household debt has surged and the debt is mainly spent. More consumption means less savings, and buying the US treasuries helped to keep the U.S. interest rates low (Areddy, 2019).
The low interest rate in China results in low rates of returns for savers, but the government accesses the savings cheaply and on favorable terms. Nonetheless, the savings rate is high there are few social protections, but in the US high consumption rates in the current period means that households save a smaller share of their income than China, despite being wealthier. The US has a more sustainable consumer economy, and China’s transition into a more consumer- led economy has been influenced by growing debt. The consumer who is an economic agent has to maximize the intertemporal utility where the price ratio between the present and future consumption are considered (Williamson, 2018).