Title: Econ 2301 Macroeconomics
1Econ 2301Macroeconomics
- Dr. Jacobson
- Mr. (Coach) Stuckey
2Chapter 10SavingsInvestment Spendingand
theFinancial System
3National Savings
4What is it?
- National Savings is the total income in the
economy that remains after paying for consumption
and government purchases. - The portion of the nations income that is not
consumed.
5Equation for National Savings
GDP YCIG
- SNational Savings, YGDP, CConsumption,
GGovernment Purchases, IInvestment
6SavingsInvestment
- Savings has to equal investments for the economy
as a whole, but not for every individual. - The bond market, stock market, banks, mutual
funds and other financial markets take the
nations savings and direct it to the nations
investment.
7National Savings
- Represents resources available for investment to
do things like replace old factories and
equipment, or to buy more and better capital
goods. - Plays a major role in our nations long-term
economic growth and future living standards. - Higher savings and investment contribute to
increased productivity and stronger economic
growth.
8The United States net national savings is less
than 1 of the GDP
- The net national savings rate has not been this
low since the Great Depression.
9Positivity of National Savings
- Savings is the main source of funds available for
domestic investment in new capital goods.
10Ways to Higher National Savings
- Tax Reforms
- Budget Deficit
- Social Security
11Tax Reforms
- Make the tax code simpler, more fair, and to
further promote savings, and job creation - Reduce the bias against savings and investment
inherent in the current system.
12Budget Deficit
- Create a plan to reduce the deficit over time
relative to the size of the economy. - Restrain government spending growth
13Social Security Reform
- Restoring Social Security to sustainable solvency
and increasing saving are intertwined national
goals. - The way in which Social Security is reformed will
influence both the magnitude and timing of any
increase in national savings.
14Negativity of National Savings
- National savings has been in the red in past
years. - The net national savings rate has not been this
low since the Great Depression. - Things are not looking too good for the future
either.
15 National debt sky high, savings not.
- Fear and obsession regarding consumer spending
continues, the fact is that the beginning of the
21st century has not been troubled with excessive
savings, but by a serious dearth in savings.
16Consequences of Negative Savings
- Negative savings rate implies a negative trade
balance. - American households are whittling down their
wealth. - Negative national savings means that the nation
is not accumulating capital
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18How Many of You Would Like to Either Start Your
Own Business or Take Over a Family Business?
19Lack of Money or Not Enough Money is the Cause of
Most Start-up Businesses Going Broke.
20Many People Have Great Ideas and Even Great
Products That Can Not Make a Go of It.
Why?Usually Implementation!
21Implementation Usually Means Money or Lack
thereof.
22Where Can One Go To Get the Necessary Capital?
23Places to Get Capital
- Money From Friends.
- Mortgage Your House.
- Relatives.
- Sell Assets.
- Banks.
- Venture Capitalists.
- Sell Stock.
- Find Investors.
24In the Last Chapter We Looked at the Various Ways
for a Country to Increase its Production.
25When People Start New Businesses Can Not That
Increase a Nations GDP?
26In this Chapter We are Going to Explore the
Various Methods Nations, Companies and
Individuals Use to Either Raise Capital or Invest.
27In ShortWhat is the Engine Driving Production
With the Needed Capital?
28In the Last Chapter We Saw How Savings and
Investment Are Key Ingredients to Long Term
Economic Growth.
29In an Economy There AreSavers- People Who
Spend Less Then They Earn.Borrowers- People Who
Spend More Than They Earn.
30The Financial System Is the Various Institutions
That Brings Savers and Borrowers Together.
31The Financial System-The Group of Institutions
in The Economy That Help to Match One Persons
Savings With Another Persons Investment.
32How Does the Financial System Work?
33Financial Institutions Can Be Grouped Into Two
Categories1. Financial Markets, and2.
Financial Intermediaries.
34Financial MarketsFinancial Markets Are the
(Financial) Institutions Through Which Savers Can
Directly Provide Funds to Borrows.
35The Two Most Important Financial Markets in the
U.S. Economy Are the Bond Market and the Stock
Market.
36A Bond- Is a Certificate of Indebtedness That
Specifies the Obligations of the Borrower To the
Holder of the Bond.
37In Simplest Terms A Bond Can Be Considered A
Loan. It is Usually Issued by Either a
Corporation or The Government.
38Bonds Because They Are A Loan (or IOU) They
Usually Do Not Include Ownership or a Right to
Share in Growth or Profits. However, Some Are
Convertible to Stock or May Include Options To
Convert.
39Bonds Usually Have A Date of Maturity and a Rate
of Interest. However This May Take A Wide
Variety of Forms.
40For ExampleBonds May Be Paid Off Early If The
Issuer Exercises A Previously Included Option
.They May Not Even Pay Interest But Simply
Discount the Face Amount of the Bond.
41Some Corporate Bonds May Be Issued With Options
to Purchase Shares of Stock at a Set Price, or
They May Be Convertible Into Shares of Common or
Preferred Stock.
42Bonds Are Rated According to Their Credit Risk.
Government Bonds Are Considered Less Risky and
Therefore Usually Pay a Lower Interest.
43Government Bonds-May Be Issued By Federal,
State or Local Governments and May Also Have Any
Interest Paid as Being Tax Exempt.
44Important NoteBonds May Go Into Default,
Wherein the Owner May Get Either a Partial
Payment or Nothing.
45The Second Type of Financial Market is Called the
Stock Market.
46StockRepresents Partial Ownership in a Company
and Therefore Has a Claim to the Profits The
Company Makes or a Share of the Proceeds When and
If the Company is Sold.
47The Sale of Stock to Raise Money is Called Equity
Finance.The Sale of a Bond to Raise Money is
Called Debt Finance.
48Shares of StockMay Be Sold Through Either a
Private Offering (Limited).Or a Public Offering
and Traded on One of the Many Exchanges.
49Stock PricesThe Price of A Share of Stock is
Determined By Supply and Demand. It is Influenced
By Expectations, Profits and the Overall Economy.
50 Bonds Vs. StocksBonds Usually Are
Paid Interest Plus a Return of the Face Amount of
the Bond.Stock Prices Vary As Does the
Companys Profits And the Market. There is No
Guarantee of A Return of Investment.
512. Financial IntermediariesThe Second Category
Besides Financial Markets is Called Financial
Intermediaries That Are Financial Institutions
Through Which Savers Can Indirectly Provide Funds
to Borrowers.
52Financial IntermediariesTwo of the Most
Important Financial Intermediaries Are Banks and
Mutual Funds.
53Other Financial Intermediaries
- Savings Banks.
- Savings and Loan.
- Life-Insurance-Companies.
- Pension Funds.
- Money Market Funds.
- Credit Unions.
54BanksBanks Are Financial Intermediaries Who
Take Deposits From People who Want to Save and
Use These Deposits to Make Loans to People who
Want to Borrow.
55Banks-Take the Savers Deposits and Pay Them an
Interest and Then Charge the Borrowers A Higher
Interest on Their Loans.
56Banks Also Facilitate Trading By Establishing a
Medium of Exchange By Making Money Available.
57A Mutual FundIs an Institution That Sells
Shares to the Public and Uses the Proceeds to Buy
a Selection, or Portfolio, of Various Types of
Stocks, Bonds, or Both Stocks and Bonds.
58The Shareholder of a Mutual Fund Accepts the
Risks and Returns Associated With the Portfolio.
Like Common Stock the Shareholder Benefits When
the Value Increases and Suffers a Loss When the
Value Decreases.
59Two Advantages of Mutual Funds Over Common Stock
- Diversification- Mutual Funds Typically Have a
Variety of Stocks in Their Portfolio. - They are Managed By Professionals Who Are Experts
in Their Field and Able to Concentrate Their
Efforts.
60Mutual Funds Also Allow a Small Investor to Buy a
Number of Different Stocks That They May
Otherwise Not Be Able to Afford.
61Let Us Again Look At Our Formula For The GDP That
Included Both The Total Income and Expenditures
Within the Borders of The United States.
62You Will (I Hope) Remember That GDP (Y)
Consumption (C) Investment (I) Government (G)
Net Export (NX)
63Now Let Us Say (For Current Purposes) That We
Have a Completely Closed Economy Where There Are
No Exports or Imports. We Know This Is Not
Realistic But Humor Me.
64From Your High School Math Days You Will Remember
That This Can Be Changed To ReadI Y C G
65In Other Words I Y C G Means the Income
That is Left After Paying for Consumption and
Government Purchases. This Amount is Called
National Savings (or Savings) and Is Denoted as
S. Therefore, SI Or Savings Equals Investment.
66National Saving The Total Income In the Economy
That Remains After Paying for Consumption and
Government Purchases.
67Let Us Now Let T Denote the Amount the Government
Collects From Households in Taxes Minus the
Amount It Pays Back to Households in the Form of
Transfer Payments.
68NoteThis is Necessary Because As You Will
Recall Transfer Payments Are Not Included In the
GDP and Therefore We Must Account For Them In the
Amount the Government Collects in Taxes.
69We Can Now Rewrite Our Equation asS (Y T
C) (T G)This Equation Separates National
Savings Into Two PiecesPrivate Savings (Y T
C) andPublic Savings (T G)
70Private SavingY T C The Income That
Households Have Left After Paying for Taxes and
Consumption.
71Public SavingT G The Tax Revenue That The
Government Has Left After Paying For Its Spending.
72Budget SurplusAn Excess of Tax Revenue Over
Government Spending.
73Budget DeficitA Shortfall of Tax Revenue From
Government Spending.
74Please Pay Attention as This May Be Hard to
Grasp.
75Important NoteAlthough in the Accounting
Savings Investment For a Nation, That Does Not
Have to Be True For an Individual.
76ExampleIf you Earn More Than You Spend On
Consumption and Put Your Money in a Bank or Some
Other Vehicle Such as Stocks or Bonds Hoping to
Get a Return on Your Money. You Are NOT
Investing as Defined By the GDP as You Are Not
Buying Buildings or Equipment.
77How Does Savings Investment?The Saving
Investment Comes in Where The Bank or Proceeds
From the Stocks or Bonds May Go to Buy Buildings
and Equipment.
78In ShortMacroeconomists Are Stealing the Word
Investment From What You and I Use it For and
Changing The Meaning.
79Market for Loanable FundsThe Market in Which
Those Who Want to Save Supply Funds and Those Who
Want to Borrow to Invest Demand Funds.
80The Market For Loanable Funds For Simplicity,
If We Say That the Economy Has Only One Financial
Market for Savers and Borrowers to go to to
Either Deposit Funds or Get Loans.
81Of Course This is Not True as There Are Many
Different Markets As We Have Just Seen, Such as
Banks, Stocks, Bonds, Mutual Funds, Etc.
82The Term Loanable Funds Refers to All Income That
People Have Chosen to Save and Lend Out Rather
Than Use for Their Own Consumption.
83In the Market of Loanable Funds There is Only One
Interest Rate, Which Is Both The Return to
Savings and The Cost of Borrowing.
84Market For Loanable Funds
Interest Rate
Supply
5
------------------------
Demand
0 1,200
Loanable Funds (In Billions of Dollars)
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90Savings Is the Source Of The Supply of Loanable
Funds.
91Investment is the Source of the Demand For
Loanable Funds.
92A Higher Interest Rate Would Encourage Saving
(Thereby Increasing the Quantity of Loanable
Funds Supplied) and Discourage Borrowing For
Investment (Thereby Decreasing the Quantity of
Loanable Funds Demanded).
93Likewise a Lower Interest Rate Would Discourage
Saving (Thereby Decreasing the Quantity of
Loanable Funds Supplied) and Encourage Borrowing
For Investment (Thereby Increasing the Quantity
of Loanable Funds Demanded).
94Market For Loanable Funds
Interest Rate
Supply
Surplus
5
--------------------------
------------------------
Shortage
Demand
0 1,200
Loanable Funds (In Billions of Dollars)
95Problem?The United States Has a Lower Saving
Rate Than Many of the Other Nations In the World.
96In 1999 Percentage of GDP Saved (Source
McConnell)Country SavedIndia
20China 42Japan
30Germany 23United States 15
97Note Many Very Poor Countries Such as Chad,
Ghana, Madagascar and Uganda Have a Negative
Savings Rate or in the 0-6 Range as the People
Are to Poor to Save.
98So What If Anything Should or Can a Government Do
to Affect the Savings Rate of the United States.
99First The Government Can Reform its Tax Laws
to Encourage Greater Savings, The Result Would Be
Lower Interest Rates and Greater Investment.
100Policy 1 Savings IncentivesIf the Government
Allows a Person to Shelter Some of Their Saving
From Taxation. Example IRA, Bonds.
101Tax Incentives
- Tax Incentives For Savings Increase the Supply of
Loanable Funds. - The Increase in the Supply of Loanable Funds,
Reduces the Equilibrium Interest Rate. - The Increase in the Supply of Loanable Funds,
Raises the Equilibrium Quantity of Loanable Funds.
102Market For Loanable Funds
Interest Rate
Supply S1
Supply S2
5
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------------------------
4
------------------------------------
-----------------
Demand
0 1,200
1,600
Loanable Funds (In Billions of Dollars)
103Policy 2 Investment IncentivesInvestment Tax
Credit Gives a Tax Advantage to Any Firm Building
a Factory or Buying a New Piece of Equipment.
104If a Reform of the Tax Laws Encouraged Greater
Investment, Through a Vehicle Such as An
Investment Tax Credit, The Result Would Be Higher
Interest Rates and Greater Savings.
105An Investment Tax Credit
- 1. An Investment Tax Credit Increases the Demand
For Loanable Funds. - 2. An Increased Demand for Loanable Funds Raises
the Equilibrium Interest Rate - 3. An Increased Demand for Loanable Funds Raises
the Equilibrium Quantity of Loanable Funds.
106Market For Loanable Funds
Interest Rate
Supply
6
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5
--------------------------
------------------------
--------------------------------
D2 Demand
D1 Demand
0 1,200
1,400
Loanable Funds (In Billions of Dollars)
107Policy 3 Government Budget Deficits and
Surpluses.Governments Finance Budget Deficits
By Borrowing in the Bond Market, and the
Accumulation of Past Government Borrowing is
Called Government Debt.
108A Government Budget Deficit
- 1. A Budget Deficit Decreases the Supply of
Loanable Funds. - The Decrease in Loanable Funds Raises the
Equilibrium Interest Rate. - The Decrease in Loanable Funds Reduces the
Equilibrium Quantity of Loanable Funds.
109Market For Loanable Funds
Interest Rate
S2 Supply
S1 Supply
6
-----------------
5
--------------------------
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-------------------------------
D1 Demand
0 1,200
800
Loanable Funds (In Billions of Dollars)
110Figure 5 The U.S. Government Debt
Percent
of GDP
120
100
80
60
40
20
0
1790
1810
1830
1850
1870
1890
1910
1930
1950
1970
1990
2010
111Questions?
112Quick WriteIf You Were President of the United
States, What Would You Do About the Savings
Problem In the U.S.?