Chapter 27 Eco - Chapter 27 Saving Investment and the Financial System[Beginning Chapter has been typed up in laptop at work Managed Funds Managed

Chapter 27 Eco - Chapter 27 Saving Investment and the...

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Chapter 27: Saving Investment and the Financial System [Beginning Chapter has been typed up- in laptop at work] Managed Funds Managed Funds: type of financial investment that allows investors to own a portfolio of various types of shares and/or bonds Individual investors in the managed fund accepts all the risk and return associated with the portfolio Main advantage of managed funds is that they allow people with small amounts of money to diversify and face less risk because they have a small stake in the company whilst any single share or bond is tied to the fortunes of one company, holding a single bond or share is risky Second advantage is that people access to the skills of professional money managers Managers buy shares of those companies that they view as having a profitable future and sell the shares of companies with less promising prospects However, the argument can be that the price of the company’s share is usually a good reflection of the company’s true value and it is hard to ‘beat the market’ Managed funds that are ‘index funds’ perform somewhat better on average than managed funds that engage the services of professional money managers Saving and investment in the national income account Some important identities Y = C + I + G + NX (assuming that the economy is closed) Because a closed economy does not engage in international trade- imports and exports are exactly zero Y = C + I + G Y – C – G = I- total income in the economy after paying for consumption and government purchases known as national savings Hence S = I S = (Y - T – C) + (T-G) which is S = Private saving + Public Saving Private saving: income that households have left after paying for taxes and consumption Public saving: tax revenue that the government has left after paying for its spending Budget surplus: excess of tax revenue over government spending Budget deficit: when government spending exceeds tax revenue For the economy as a whole saving must equal investment Meaning of saving and investment Deposits his unspent income in a bank or users it to buy a bond in some shares from a corporation- this is added to savings as income exceeds consumption even though he is investing in shares Investments refers to the purchase of new capital such as equipment and buildings The market for loanable funds Market for loanable funds: market in which those who want to save supply funds and those who want to borrow to invest demand funds
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In this market there is only one interest rate, which is both the return on saving and the cost of borrowing Supply and demand for loanable funds Supply of loanable funds comes from those people who have some extra income they want to save and lend out and from the government when government revenue is in excess of government expenditure The demand for loanable funds comes from households and firms who wish to borrow to make investments
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