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15. Principles of Economics (Brief Edition)_2e (15)

Chapter 15: Saving, Capital. Formation, and Financial Markets.1. Explain the relationship between savings and. wealth.2. Identify and apply the components of national. saving.3. Discuss the reasons why people save.4. Discuss the reasons why firms choose to invest. in capital rather than financial assets.5. Analyze financial markets using the tools of. supply and demand McGraw­Hill/Irwin Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved. Savings and Wealth.• Saving is current income minus spending on. current needs. – The saving rate is saving divided by income.• Wealth is the value of assets minus liabilities. – Assets are anything of value that one owns. – Liabilities are the debts one owes. – The balance sheet is a list of an economic unit’s. assets and liabilities. • Specific date. • Economic unit (business, household, etc.) 15­2Flow Variables and Stock Variables.• A flow variables is defined per unit of time. – Income, spending, saving, wage.• A stock variable is defined at a point in time. – Wealth, debt.• The flow of saving causes the stock of wealth. to change.Capital Gains and Losses.• Wealth changes when the value of your assets change. – Capital gains increase the value of existing assets. – Capital losses decreases the value of existing. assets 15­3 National Savings.• Macroeconomics studies total savings in the. economy. – Household savings is one component. – Business and government savings are other parts.• Start with the definition of production and income. for the economy. Y = C + I + G + NX. Y = aggregate income. C = consumption G = government. expenditure purchases of goods. and services. I = investment spending NX = net exports. 15­4 Calculate National Savings.• Assume NX = 0 for simplicity.• National savings (S) is current income less. spending on current needs. – Current income is GDP or Y.• Spending on current needs. – Exclude all investment spending (I). – Most consumption and government spending is for. current needs. • For simplicity, we assume all of C and all of G are for. current needs. S=Y–C–G. 15­5 Private Saving.• Private saving is household plus business saving.• Households total income is Y.• Households pay taxes (T) from this income. – Government transfer payments increase household. income. • Transfer payments are made by the government to. households without receiving any goods in return. – Interest is paid to government bond holders. T = Taxes – Transfers – Government interest. payments. 15­6 Public Saving and National. Saving.• Public saving is the amount of the public sectors income. that is not spend on current needs. – Public sector income is net taxes. – Public sector spending on current needs is G. SPUBLIC = T – G.• National saving (S) is private savings plus public savings SPRIVATE + SPUBLIC = (Y – T – C) + (T – G). S=Y–C–G. 15­7 The Government Budget.• Balanced budget occurs when government. spending equals net tax receipts. – Government budget surplus is the excess of. government net tax collections over spending (T –. G). – Government budget deficit is the excess of. government spending over net tax collections From Surplus to Deficit.• Three reasons for change in government budget. – Government receipts decreased during the 2001. recess