Chapter 10 - chapter: 10 > Savings,InvestmentSpending,...

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1 of 58 chapter: 10 >> Savings, Investment Spending,  and the Financial System
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2 of 58 An Expanded Circular-Flow Diagram Government Firms Markets for goods and services Financial Markets Households Factor Markets Rest of the world Government purchases of goods and services Government borrowing Private savings Government transfers Wages, profit, interest, rent Wages, profit, interest, rent Borrowing and stock issues by firms Foreign borrowing and sales of stock Foreign lending and purchases of stock Exports Imports GDP Taxe s Consumer spending
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3 of 58 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 five principal types of assets : stocks , bonds , loans, real estate and bank deposits How financial intermediaries help investors achieve diversification Some competing views of what determines stock prices and why stock market fluctuations can be a source of macroeconomic instability
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4 of 58 Matching Up Savings and Investment Spending According to the savings–investment spending identity, savings and investment spending are always equal for the economy as a whole. The budget surplus is the difference between tax revenue and government spending when tax revenue exceeds government spending. The budget deficit is the difference between tax revenue and government spending when government spending exceeds tax revenue.
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5 of 58 Matching Up Savings and Investment Spending The budget balance is the difference between tax revenue and government spending. National savings, the sum of private savings plus the budget balance, is the total amount of savings generated within the economy. Capital inflow is the net inflow of funds into a country.
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6 of 58 The Savings–Investment Spending Identity In a simplified economy: (1) Total Income = Total Spending (2) Total income = Consumption spending + Savings Meanwhile, spending consists of either consumption spending or investment spending: (3) Total spending = Consumption spending + Investment spending Putting these together, we get: (4) Consumption spending + Savings = Consumption spending + Investment spending Subtract consumption spending from both sides, and we get: (5) Savings = Investment spending
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7 of 58 The Savings–Investment Spending Identity In a simplified economy: GDP = C + I + G SPrivate = GDP + TR T C SGovernment = T TR G NS = SPrivate + SGovernment = (GDP + TR T C ) + ( T TR G ) = GDP − C G Hence, I = NS Investment spending = National savings in a closed economy
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PITFALLS Investment versus investment spending When macroeconomists use the term investment spending, they almost always mean “spending on new physical capital.” This can be confusing, because in ordinary life we often say that someone who buys stocks or purchases an existing building is “investing.”
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Chapter 10 - chapter: 10 > Savings,InvestmentSpending,...

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