Chapter19_FINAL.pptx - Saving Capital Formation and...

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Saving, Capital Formation, and Financial Markets Chapter 19
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Savings and Wealth Saving is current income minus spending on current needs The saving rate is saving divided by income Wealth is the value of assets minus liabilities Assets are anything of value that one owns Liabilities are the debts one owes 19-2
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Flow Values and Stock Values A flow value is defined per unit of time Income Spending Saving Wage A stock value is defined at a point in time Wealth Debt The flow of savings causes the stock of wealth to change Every dollar a person saves adds to his wealth A high rate of saving today leads to an improved standard of living in the future 19-3
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Capital Gains and Losses Wealth changes when the value of your assets change Capital gains increase the value of existing assets Higher value for stock Capital losses decreases the value of existing assets Car accident damages bumper and front headlight Change in wealth = Saving + Capital gains – Capital losses 19-4
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National Savings Macroeconomics studies total savings in the economy Household savings is one component Business and government savings are other parts Start with the definition of production and income for the economy Y = C + I + G + NX 19-5 Y = aggregate income C = consumption expenditure G = government purchases of goods and services I = investment spending NX = net exports
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Calculate National Savings Assume NX = 0 for simplicity National savings (S) is current income less spending on current needs Current income is GDP or Y Spending on current needs Exclude all investment spending (I) Most consumption and government spending is for current needs For simplicity, we assume all of C and all of G are for current needs S = Y – C – G 19-6
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Private Saving Private saving is household plus business saving Household's total income is Y Households pay taxes (T) from this income Government transfer payments increase household income Transfer payments are made by the government to households without receiving any goods in return T = Taxes – Transfers 19-7
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Private Saving Private saving is after-tax income less consumption S PRIVATE = Y – T – C
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