Test 2 Notebook - Chapter 8 Saving and Financial Markets Investment and the Financial System If the key driver of economic growth is investment the

Test 2 Notebook - Chapter 8 Saving and Financial Markets...

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Chapter 8: Saving and Financial Markets 12/03/2015°°Investment and the Financial SystemIf the key driver of economic growth is investment, the markets and sectors producing investment must be understoodAl players in society can be positively or adversely effected by the financial sector°°Savings and WealthSavingis current income minus spending on current needsoThe saving rate is saving dived by incomeWealth is the value of assets minus liabilitiesoAssetsare anything of value that one ownsoLiabilitiesare the debts one owesoThe balance sheet is a list of an economic unit’s assets and liabilitiesSpecific dateEconomic unit (business, household, etc.)°°Flow Values and Stock ValuesA flow value is defined per unite of timeoIncome  spendingoSaving  wageA stock value is defined at a point in time
oWealth  debtThe flow of savings causes the stock of wealth to changeoEvery dollar a person saves adds to his wealthA high rate of saving today leads to an improved standard of living in the future°°Capital Gains and LossesWealth changes when the value of your assets changeoCapital gains increase the value of existing assetsHigher value for stockoCapital losses decreases the value of existing assetsCar accident damages bumper and front headlightChange in wealth = saving + capital gains – capital losses°°Saving, Investment, and the Financial SystemFinancial system the system of financial markets and financial intermediaries through which firms acquire funds from householdsAn overview of the financial systemoFinancial markets markets where financial securities, such as stocks and bonds, are bought and soldoFinancial intermediaries firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowersThe Macroeconomics of Saving and InvestmentoY = C + I + G + NXoY = C + I + G
oI = Y – C – GoS private = Y + TR – C – ToS public = T – G – TRoS = S private + S publicoroS = (Y + TR – C – T) + (T-G-TR)oroS = Y – C – GoSo we can conclude that total saving must equal total investmentS = I°°National SavingsMacroeconomics studies total savings in the economyoHousehold savings is one componentoBusiness and government savings are other partsStart with the definition of production and income for the economyY = C + I + G + NXoY = aggregate incomeoC = consumption expenditureoI = investment spendingoG = government purchases of goods and services
oNX = net exports°Calculate National SavingsAssume NX = 0 for simplicityNational savings (S) is current income less spending on current needsoCurrent income is GDP or YSpending on current needsoExclude all investment spending (I)oMost consumption and government spending is for current needsFor simplicity, we assume all of C and all of G are for current needsS = Y – C – G°°Private SavingPrivate Saving

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