saving investment, financial system

saving investment, financial system - Lecture 7: SAVINGS,...

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Click to edit Master subtitle style Dr. Fidel Gonzalez Department of Economics and Intl. Business Sam Houston State University Lecture 7: SAVINGS, INVESTMENT AND THE PRINCIPLES OF MACROECONOMICS
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In the previous set of slides we talked about long-run growth and found out that the main determinant of this long-term growth is productivity. Moreover, we show that productivity (Y/L) depends on capital per worker (K/L). The higher the capital the higher the productivity and the long-run growth. That is: growth K Y K L L ⇒↑ ⇒↑ ⇒↑ Ok, now that we know that we want to increase capital (K) to increase long-run growth the question is: How do we increase capital in a country? A: The short answer is that we can increase capital by increasing investment. Investment refers to the purchase of machinery, equipment and buildings by firms and the government. Once investment takes place, then it becomes capital. Think of capital as the accumulation of previous
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Capital and Investment Bathtub The level of the bathtub is the Water entering the bathtub is investment Water leaving the bathtub is depreciation The following diagram shows the relationship between investment, capital and depreciation. Investment takes place every year and add to the capital stock. Depreciation also takes place every year and reduces the capital stock. The diagram represent a bathtub where the inflow of water is investment, the water level is the capital stock and the outflow of water is the depreciation. Capi tal
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Ok, more investment produces more capital which produces higher productivity which produces higher growth: growth K Y I K L L ↑ ⇒↑ ⇒↑ ⇒↑ ⇒↑ If investment is so important for growth then the question now is: How do we increase investment in a country? A: The short answer is that we can increase investment by increasing savings. The income of a country like the income of a person can be used for two things: consume goods and services today and save for future use. Inco me Consumption today Saving s Consumption in the future
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The diagram of the previous page shows that if we want to increase savings we have to reduce consumption today. That is the main problem about increasing investment. In order to increase investment we have to save more but increasing savings requires a country to reduce consumption today and nobody wants to do that. The diagram from the previous page also shows that the decision between saving and consumption today is really a decision between how much to consume today and how much to consume in the future. The more we save, the higher our future consumption but the lower our present consumption. The investment decision is also really a decision between today and future consumption.
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This note was uploaded on 06/06/2011 for the course ECON 233 taught by Professor Fidel during the Fall '10 term at Sam Houston State University.

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saving investment, financial system - Lecture 7: SAVINGS,...

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