Krugman2e_Ch26 - chapter: 26 W WO R LD V > Savings,...

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W O R L D V I E Savings, Investment Spending, and the Financial System 673 >> 26 A HOLE IN THE GROUND chapter: ETWEEN 1987 AND 1994, A LARGE INTERNA- tional group of private investors threw $16 bil- lion into a hole in the ground. But this was no ordinary hole: it was the Channel Tunnel, popularly known as the Chunnel. Engineers had dreamed for cen- turies about linking Britain directly to France so that travelers would no longer have to cross the often-stormy seas of the English Channel. The Chunnel fulfills that dream, allowing passengers to take a comfortable, fast train (and transport their cars, too) underneath the 31- mile-wide strait. Everyone agrees that the Chunnel is a big improve- ment on the previously available alternatives. It’s much faster than taking a ferry. Even flying from London to Paris can easily be an all-day affair, what with getting to and from the airports and air traffic delays. The Eurostar, the express train through the Chunnel, gets you from downtown London to downtown Paris in 2 1 / 2 hours. How could such a massive investment be financed? The French and British govern- ments could have built the Chunnel but chose to leave it to private initiative. Yet the size of the required investment was beyond the means of any individual. So how was the money raised? The answer: the Eurotunnel Corporation, the company formed to build the Chunnel, was able to turn to the financial markets. It raised $4 billion by selling stock to thousands of people, who then became part-owners of the Chunnel, and an additional $12 billion through bank loans. Raising this much money was an incredible feat, in a way as incredible as the engi- neering required in the construction of the Chunnel. Yet modern economies do this sort of thing all the time. The long-run growth we analyzed in the previous chapter depends crucially on a set of markets and insti- tutions, collectively known as the financial system, that channels the funds of savers into productive investment spending. Without this system, businesses would not be able to purchase much of the physical capital that is such an important source of productivity growth. And savers would be forced to accept a lower return on their funds. Historically, financial systems channeled funds into in- vestment projects such as railroads, factories, electrifica- tion, and so on. Today, financial systems channel funds into sources of growth such as telecommunications, ad- vanced technology, and investments in human capital. Without a well-functioning financial system, a country will suffer stunted economic growth. ©PeterBarritt/Alamy B Due to the savings of millions of people, travellers can now enjoy a quick trip between London and Paris in the Chunnel.
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674 PART 11 LONG-RUN ECONOMIC GROWTH Matching Up Savings and Investment Spending We learned in the previous chapter that two of the essential ingredients in economic growth are increases in the economy’s levels of human capital and physical capital.
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This note was uploaded on 08/31/2009 for the course ECON 701 taught by Professor Charlie during the Spring '09 term at École Normale Supérieure.

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Krugman2e_Ch26 - chapter: 26 W WO R LD V > Savings,...

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