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Chapter 26 - 610-635_CH26_Econ.qxp 4:45 PM Page 610 chapter...

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610 >> Savings, Investment Spending, and the Financial System chapter 26 ETWEEN 1987 AND 1994, A LARGE international group of private in- vestors threw $15 billion 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 centuries 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 ship their cars, too) underneath the 31-mile-wide strait. Everyone agrees that the Chunnel is a big improvement on the previously available al- ternatives. 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 de- lays. The Eurostar, the express train through A HOLE IN THE GROUND B A quick and luxurious ride from London to Paris beneath the English Channel was made possible by the savings of millions of people. Alain Nogies/Corbis Sygma Thierry Prat/Corbis Sygma the Chunnel, gets you from downtown Lon- don to downtown Paris in three hours. How could such a massive investment be financed? The French and British gov- ernments 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 Corpora- tion, 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 addi- tional $12 billion through bank loans. Rais- ing this much money was an incredible feat, in a way as incredible as the engineer- ing required in the construction of the Chunnel. What you will learn in this chapter: The relationship between savings and investment spending Aspects of the loanable funds market, which shows how savers are matched with borrowers The purpose of the four principal types of financial assets: stocks, bonds, loans, and bank deposits How financial intermediaries help investors achieve diversifi- cation Some competing views of what determines stock prices and why stock market fluctuations can be a source of macroeconomic instability 610-635_CH26_Econ.qxp 10/25/05 4:45 PM Page 610
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Matching Up Savings and Investment Spending We learned in Chapter 25 that two of the essential ingredients in economic growth are increases in the economy’s levels of human capital and physical capital . Human capital is largely provided by government through public education. (In countries with a large pri- vate education sector, like the United States, private post-secondary educa- tion is also an important source of human capital.) But physical capital, with the exception of infrastructure, is mainly created through private investment spending—that is, spending by firms rather than by the government.
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