Saving and Capital Formation

1
Saving and Capital Formation

• Chapter 9

2
Saving Wealth

• Saving flow
• Wealth stock

3
Three Types of Saving

• Life cycle
• Precautionary
• Bequest

4
http//federalreserve.gov/releases/z1/current/acce
ssible/f8.htm
5
National Saving and Its Components

• The Measurement of National Saving
• National Saving (S) Y - C - G

6
National Saving and Its Components

• Private and Public Components of National Saving
• National Saving (S) Y - C - G
• T (net taxes) private sector tax payments
  (transfer payments and interest payments)
• S Y - C - G T - T
• S (Y - T - C) (T - G)
• Private saving Sprivate Y - T - C
• Public saving Spublic T - G

7
National Saving and Its Components

• Private and Public Components of National Saving
• Two components of private saving
  (Sprivate Y - T - C)
• Household (personal) saving
• Business saving

8
Household Saving Rate in the United States, 1960
- 2001

• Observations
• Household saving has fallen dramatically
• National saving has not declined in recent years

9
National Saving and Its Components

• Private and Public Components of National Saving
• Spublic T - G
• Includes
• Federal
• State
• Local

10
National Saving and Its Components

• Government Budget Deficit
• The excess of government spending over tax
  collections (G - T)

11
National Saving and Its Components

• Private and Public Components of National Saving
• S (Y - T - C) (T - G)
• S Sprivate Spublic
• National Saving (S) is composed of saving by
  households, businesses, and government (federal,
  state, and local)

Private
Public
12
U.S. National SavingRate, 1960 - 2001
13
The Three Components of National Saving, 1960-
2001
14
Determinants of Investment

• Price of capital goods
• Cost of funds (real interest rate)
• Taxes on profits of capital
• Prices of final goods
• Productivity of capital

15
Supply and Demand Again

• Supply of savings meets the demand for investment.

16
Global Savings Glut?

• If the U.S. runs a current account deficit, it
  will use up savings from other nations.
• Which comes first current account deficit or
  flow of saving from other nations?