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

Chapter 15: Saving, Capital. Formation, and Financial . Explain the relationship between savings and. . Identify and apply the components of national. . Discuss the reasons why people . Discuss the reasons why firms choose to invest. in capital rather than financial . 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 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