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Lecture 4 Savings and CA

Lecture 4 Savings and CA - "#$&)$,$&)$/012330/$42...

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Unformatted text preview: !"#$%&'()$*+,,$&'-')$./012330/$42+5/67$.++,$ (2:5;/2$%<$$=2+3;/2>2?5$ !"#$%&"'(! 89-9&'-'$ "#$%&'#(!)#*%'+!#',!$-.!/011.'$!#//&0'$! Last time the circular flow and national income accounting ( C h a p t e r 2.1, 2.2) real vs. nominal interest rates ( C h a p t e r 2.5) read on your own: real vs. nominal GDP, measurement of the price level ( C h a p t e r 2.4) Today Q u i z 1 posted; due Sunday 9/5, 11:59 pm with 2-hour grace period introduction: our SI leader savings identities ( C h a p t e r 2.3) the current account ( C h a p t e r 2.3) national wealth, stocks and flows ( C h a p t e r 2.3) Next time preview of the model the aggregate production function ( C h a p t e r 3.1) 2&'/.3$)!&4!5'/&6.! Private sector and government sector income Total income in a country: G N P = G D P + N F P Received by: private sector (households and businesses) and government p r i v a t e d i s p os a b l e i n c o m e = G N P T + T R + I N T n e t go v e r n m e n t i n c o m e = T T R I N T &$ [email protected]$ !"#$%&'()$*+,,$&'-')$./012330/$42+5/67$.++,$ (2:5;/2$%<$$=2+3;/2>2?5$ 89-9&'-'$ %$ 71%*#$.!#',!+&*.1'6.'$!)#*%'+! saving in general is defined as cu r rent income minus cu r rent consumption saving can be positive or negative both the private sector and the government can save p r i v a t e sa v i ng = private disposable income consumption go v e r n m e n t s a v i n g (go v e r n m e n t b u d g e t s u r p l u s ) = net government income government purchases = go v e r n m e n t r e c e i p t s go v e r n m e n t o u t l a y s "#$%&'#(!)#*%'+!! !"#$%$&$'%( %)&$'%)*(+),$%-!"!#$%&'()!*'&%+,!-!,.&)$+/)+(!*'&%+,0! A$ %(!1'+!2)!$)3$%(()+!'*! & & !"# & $%# 4' ()* +, -(+ + . 5 4+ +, -(+ / 5 ' ()* . / funds vs. goods One can think of saving both in terms of funds and in terms of goods For example, national saving means both Current income of a country that is not spent on current consumption by the private sector or the government Newly produced goods that a country has claims on, and which are not consumed either by the private sector or the government. &[email protected]$ !"#$%&'()$*+,,$&'-')$./012330/$42+5/67$.++,$ (2:5;/2$%<$$=2+3;/2>2?5$ 89-9&'-'$ B$ 8-.!0).)!&4!)#*%'+! derivation with notation national saving is S = Y + N F P C G we know from national income accounting that Y = C + I + G + N X combining these two observations we get S S C I G NX I NX N F P CA where NFP C G : c u r r e n t a c cou n t Intuition saving, from the perspective of goods, is the newly produced goods that the country has claim on, but it does not consume in the current period these consist of investment goods exported goods (on net) 8-.!0).)!&4!31%*#$.!)#*%'+! derivation recall that S = Spvt + Sgmt and S = I + C A therefore C$ S pvt S S gmt I C A S gmt S pvt I C A ( S gmt ) private saving investment current account government deficit example 0 the government runs a deficit of $25, the private sector saves $10, and there is $26 investment. What is the current account balance? from the uses of private saving: from the savings identity national saving: %[email protected]$ !"#$%&'()$*+,,$&'-')$./012330/$42+5/67$.++,$ (2:5;/2$%<$$=2+3;/2>2?5$ 89-9&'-'$ D$ 5'$.131.$#$%&'!#',!%63(%/#$%&')! S pv t I C A ( S gmt ) private saving finances domestic investment the current account (what does it mean to finance the current account? government deficit later) an increase in government deficits means at least one of the following private saving must increase investment must fall current account balance must fall (deficit must increase) one of the following happens private saving increases government saving increases/deficit falls 8-.!/011.'$!#//&0'$! CA = NX + NFP NX: net exports usually, we think of it as: net outflow of goods and services but it is also: net inflow of payments for these goods and services NFP: net factor payments from abroad usually, we think of it as: net inflow of factor payments but it is also: net outflow of factor services (labor and capital) in exchange for these payments (in the balance of payments accounts, the current account also includes net unilateral transfers, which we ignore here) @$ Summary: CA can be interpreted as a flow of funds or as a as a flow of funds: CA = net payments received from abroad in exchange for goods, services, and factor services as a flow of real things CA = net outflow from a country of goods, services and factor services [email protected]$ !"#$%&'()$*+,,$&'-')$./012330/$42+5/67$.++,$ (2:5;/2$%<$$=2+3;/2>2?5$ 89-9&'-'$ ! this statement best understood from the perspective of real flows CA: outflow of real things where do these real things come from? they come from domestic production, if that domestic production is not consumed domestically, but instead saved 8$ 8-.!%'$.1$.63&1#(!#)3./$)!&4!$-.!/011.'$!#//&0'$! The CA as net foreign asset accumulation -'$ What form does a payment take? A payment made in exchange for goods, services or factor services is also a transfer of an asset. domestic asset or foreign asset existing asset or newly created asset Therefore, the CA balance represents the net accumulation of foreign assets. A surplus is either an increase in foreign asset holdings, or The CA as net foreign lending What is the point of accumulating foreign assets? giving up current resources (goods, services or factor services), so that the assets accumulated can be used in the future to buy future resources (goods, services and factor services) Therefore, the CA balance represents the net increase in foreign lending. A surplus is either an increase in foreign lending, or a reduction in foreign debt [email protected]$ !"#$%&'()$*+,,$&'-')$./012330/$42+5/67$.++,$ (2:5;/2$%<$$=2+3;/2>2?5$ 89-9&'-'$ --$ 29!)013(0)!*):!,.4%/%$! Surplus r e a l t h i ngs flow o u t on net in exchange for net i n f lo w of p a y me n t s Deficit r e a l t h i ngs flow i n on net in exchange for net o u t f lo w of p a y me n t s Good or bad? surplus is not necessarily desirable, deficit is not necessarily bad some of the current account balance arises from private exchanges: just like in any other exchange, both parties are better off, otherwise they would not have entered the transaction BUT: the worrisome part arises from the intertemporal aspect of the CA: a CA deficit means net reduction in foreign assets, or foreign borrowing. this borrowing needs to be repaid in the future with real resources .;#63(.!&4!+&&,!#',!<#,!0).)!&4!29!,.4%/%$)=! East-Asian miracles: -&$ CA deficits financed domestic investments (in physical capital), which expanded the productive capacity of the country, and allowed easy repayment Latin-American economies: CA deficits financed government deficits and wasteful programs. There were no extra resources when it came time to repay. [email protected]$ !"#$%&'()$*+,,$&'-')$./012330/$42+5/67$.++,$ (2:5;/2$%<$$=2+3;/2>2?5$ 89-9&'-'$ -%$ "#$%&'#(!>.#($-! Wealth (net worth) = assets liabilities true for an individual as well as for a nation physical assets (capital stock and land) net foreign financial assets domestic financial assets held by domestic residents are not part of national wealth: they are an asset for one resident, but a liability for another (Note: human capital could be included, but it is not.) National wealth changes if The value of existing assets changes Through national saving: recall S = I + C A I : create more physical capital C A: accumulate more foreign assets The stock of national wealth changes through the flow of national saving ?$&/@)!#',!4(&>)! definitions st oc k v a r i a b l e : quantity measured at a point in time examples: money stock, capital stock, national wealth, government debt f lo w v a r i a b l es: quantity measured over a period of time examples: GDP ($/year), C, I, NX, G, government deficit, national saving some variables are not called either stocks or flows, but they could be measured at a point in time, or over time examples: price level, inflation rate, interest rate -A$ stocks change through flows 1. 2. stock of national wealth changes through the flow of national saving see previous slide capital stock changes through the flow of net investment 0$ 3. ! 0$ 1$ *#+,#-&.$&/"$ "#$%&"'#($)#"$ capital at the beginning of period t gross investment during period t the stock of government debt changes through the flow of government deficit see next slide [email protected]$ !"#$%&'()$*+,,$&'-')$./012330/$42+5/67$.++,$ (2:5;/2$%<$$=2+3;/2>2?5$ 89-9&'-'$ -B$ A&*.1'6.'$!<0,+.$!/&')$1#%'$! notation : government bonds at the end of period t : government expenditures during period t : net taxes collected during period t t 5$ !2! & 3 6$ 78$ 7$ 5$ 5$ 5$ ! &5$ ! 6$ 78$ 7$ 197$ 5$ 5$ ! 27$ 78$ 197$ 6$ 3 -;."4#%&"%4/'#,")#"$%*#<$ 4/'#,")#"$%*#=&-&$ :$4)$ :$4)$ @[email protected]$ ...
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