Ch009 - Chapter 9 Saving and Capital Formation Overview...

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Chapter 9 Saving and Capital Formation Overview This chapter looks at saving and its links to the formation of new capital. It defines the concepts of saving and wealth and explores the connection between them. The chapter considers why people save, rather than spend, their income as well as the level of national saving. It also considers the decision to invest in new capital (as analogous to the decision to increase employment). Finally, the chapter presents the link between national saving and capital formation, using a supply and demand approach. Core Principles Cost-Benefit Principle - the chapter uses the cost-benefit principle to explain an individual's decision to save; in particular, the point is made that the benefit of saving increases with the real interest rate. Cost-Benefit Principle - the same principle is applied to a firm's decision to employ more capital or invest in new technology; the expected benefit must compare favorably to the expected cost. Opportunity Cost - the real rate of interest is presented as the opportunity cost of a capital investment. Equilibrium Principle - the equilibrium interest rate is the rate at which both borrowers and lenders are satisfied, and no opportunities are left unexploited in the financial market. Important Concepts Covered Saving and the saving rate Wealth Assets/liabilities Flow versus stock Capital gains and losses Life-cycle, precautionary, and bequest saving National, private, and public saving Transfer payments Government budget deficits and surpluses Crowding out 121
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Teaching Objectives After completing this chapter, you want your students to be able to: Define saving, saving rate, wealth, assets, liabilities, stocks, flows, capital gains and capital losses Explain the link between saving and wealth Discuss factors that change wealth Identify three reasons for saving Explain the relationship between saving and the real interest rate Discuss why the U.S. household saving rate is so low and whether it is a macroeconomic or microeconomic problem Define national saving and transfers Define private saving and its components Define public saving and government budget deficit/surplus and explain the relationship between them Apply cost-benefit analysis to the investment decision Identify factors that affect the costs and benefits of investment Use supply and demand to analyze national saving Define crowding out Chapter Outline I. Introduction/Overview A. Saving is important both to individuals and to nations. 1. People need to save for retirement and other future needs, and to provide an emergency fund. 2. At the national level, saving provides the resources for the production of new capital goods, which is an important factor promoting economic growth. 3.
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Ch009 - Chapter 9 Saving and Capital Formation Overview...

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