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N. GREGORY MANKIW BRIEF PRINCIPLES OF MACROECONOMICS Eight Edition Saving, Investment, and the Financial System 1 CHAPTE R 8
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Look for the answers to these questions: What are the main types of financial institutions in the U.S. economy, and what is their function? What’s the difference between saving and investment? How does the financial system coordinate saving and investment? How do government policies affect saving, investment, and the interest rate? 2
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A Picture Is Worth a Thousand Statistics A typical family with all their possessions in the U.K., an advanced economy. 3 GDP per capita = $39,040 Child mortality rate = 0.4% Access to modern sanitation facilities = 100% Educational attainment =60% enrolled in higher education
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A Picture Is Worth a Thousand Statistics A typical family with all their possessions in Mexico, a middle income country 4 GDP per capita = $16,640 Child mortality rate = 1.3% Access to modern sanitation facilities = 85% Educational attainment =30%
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A Picture Is Worth a Thousand Statistics A typical family with all their possessions in Mali, a poor country 5 GDP per capita = $1,510 Child mortality rate = 11.5% Access to modern sanitation facilities = 25% Educational attainment =7%
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Incomes and Growth Around the World FACT 1: Vast differences in living standards around the world. FACT 2: Great variation in growth rates across countries. 6
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Economic Growth and Public Policy The ways public policy can affect long-run growth in productivity and living standards: Saving and investment (focus of this chapter) Education Health and nutrition Property rights and political stability Free trade; Research and development Population growth 7
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Saving and Investment Saving and investment raise future productivity Reduce consumption, increase saving, to invest more resources in the production of capital today Larger stock of capital and be able to produce more tomorrow How financial markets coordinate saving and investment? 8
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Financial Institutions Financial system Group of financial institutions in the economy that help match the saving of one person with the investment of another Saver: income > expenditure; supplier of funds Borrower: income < expenditure; demander of funds 9
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Financial Institutions Financial institutions The financial system moves the economy’s scarce resources from savers to borrowers Two categories: Financial markets Financial intermediaries 10
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Financial Markets Financial markets Savers can directly provide funds to borrowers Two categories: The bond market The stock market Means of raising money for a large corporate: Sell bonds Sell shares of stock 11
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The Bond Market The bond market To raise money a government or company can sell bonds to the public A bond is a certificate of indebtedness Important types of bonds: government bond and corporate bond 12
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Types of Bond U.S. Government bond: issued by the U.S. federal government » Treasury notes: matures less than a year »
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