1. Use any source available to define household savings rate. What would have to occur for it to be negative? What factors encourage household savings in countries like China and Japan?

The personal saving rate that the Commerce Department's Bureau of Economic Analysis issues each month is arrived at by subtracting everything we spend money on—from mortgage payments to a night on the town— from our disposable income which, in economic terminology, is personal income minus taxes. What’s left over— the stuff you didn't spend—is what you have to save. As mentioned in the article, the savings rate has actually been negative for the last four quarters. For this rate to be negative, consumers have to be spending more than they are taking in. In the economic jargon, personal consumption expenditures are greater than personal income. Visit http://www.bea.gov/briefrm/saving.htm to see a revealing graph of the personal savings rate from 2000 to 2006. Factors that encourage household savings include cultural attitudes, the range of goods available for consumption, and consumers’ attitudes towards the future.

2. Discuss how the Chinese government’s practice of buying dollars keeps the value of the yuan from rising.

The huge trade deficit between China and the U.S. is a result of Americans buying more goods and services from China than they sell to China. American buyers have to demand yuan to pay for their Chinese purchases. This increased demand for yuan would, in a free market, cause the yuan to appreciate. Rather than relieving the upward pressure on the price of yuan, the Chinese central bank will buy dollars with yuan. This will decrease the supply of yuan in the foreign exchange market artificially, and the price of yuan will rise even further; it will also increase the number of dollars in circulation and the price of the dollar will fall. When American politicians call for China to stop the manipulation, they are asking that China pay for its imports in yuan, putting more yuan in circulation and allowing its price to come to a natural equilibrium at a higher level.

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