04+Saving+and+Investment (1)

04+Saving+and+Investment (1) - Agenda 1. Relationship...

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1 4-1 Saving and Investment in Closed and Open Economies 4-2 Agenda 1. Relationship between Saving and Wealth 2. Saving and Investment in a Closed Economy 3. Saving and Investment in an Open Economy 4-3 Saving and Wealth Saving = current income – current spending National saving consists of: 1. Private saving, S P , and 2. Government saving, S G Saving is a flow variable 4-4 Saving and Wealth 1. Private saving, S P , is given by: S P = Y –T –C •w h e r e a. S P = private saving, b. Y = GDP, c. T = net taxes (tax revenues minus transfer and interest payments), and d. C = Consumption
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2 4-5 Saving and Wealth •T h e private saving rate is given by: S P / ( Y – T ) * 100 •w h e r e a. S P = private saving, b. Y = GDP, and c. T = net taxes (tax revenues minus transfer and interest payments). 4-6 Saving and Wealth Private Saving Rate Percent of GDP 10 05 00 95 90 85 80 75 70 65 60 55 Source: Haver Analytics 15 10 5 0 15 10 5 0 4-7 Saving and Wealth 2. Government saving, S G , is given by: S G = T – G C T – G h e r e a. S G = government saving, b. T = net taxes (tax revenues minus transfer and interest payments), c. G C = Government consumption purchases, and d. G = Total government purchases 4-8 Saving and Wealth Government saving, T – G, also reflects the government’s budget balance . 1. When T – G > 0, there is a budget surplus 2. When T – G < 0, there is a budget deficit Government dissaving
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3 4-9 Saving and Wealth •T h e government saving rate is given by: S G / Y * 100 •w h e r e a. S G = government saving, and b. Y = GDP 4-10 Saving and Wealth Government Saving Rate Percent of GDP 10 05 00 95 90 85 80 75 70 65 60 55 Source: Haver Analytics 8 4 0 -4 -8 -12 8 4 0 -4 -8 -12 4-11 Saving and Wealth National saving, S, is given by: S = S P + S G •o r S = Y – C – G 4-12 Saving and Wealth h e national saving rate is given by : S / Y * 100 h e r e a. S = national saving, and b. Y = GDP
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4 4-13 Saving and Wealth National Saving Rate Percent of GDP 10 05 00 95 90 85 80 75 70 65 60 55 Source: Haver Analytics 16 12 8 4 0 -4 16 12 8 4 0 -4 4-14 Saving and Wealth The Uses-of-Saving Identity starts with: 1. National income : Y = C + I + G + NX 2. National saving : S=Y–C–G 4-15 Saving and Wealth Substituting gives S = C + I + G + NX – C – G or S = I + NX National saving is used in two ways: 1. To finance investment ( I ) 2. To finance net export surpluses (NX) 4-16 Saving and Wealth If S = I + NX •t h e n S – I = NX –T h i s i s t h e net capital outflow identity
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5 4-17 Saving and Wealth When S – I > 0, then NX > 0 and there are: 1. Net capital outflows or 2. Net foreign investment When S – I < 0, then NX < 0 and there are: 1. Net capital inflows
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04+Saving+and+Investment (1) - Agenda 1. Relationship...

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