ch13_savingmath(2)

# ch13_savingmath(2) - The math behind savings Step by step 2...

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Unformatted text preview: The math behind savings Step by step 2 Defining Savings Assume individual are homogeneous Y d = Disposable Income = Y - T + Tr (1) • Y = Income • T = Taxes • Tr = Transfers (ie, Welfare such as social security and unemployment benefits) What can you do with your disposable income? Save it or consume it. Y d = C + S PR (2) • S PR = Private Savings = The portion of households’ income that is not used for consumption or paying taxes Combine (1) and (2) S PR = Y - T + Tr – C (3) • Personal Savings Rate = S PR /Y d For simplicity, we are going to abstract from business saving (things like retained earnings etc.). 3 A Look at Actual U.S. Household Saving Rates: 1970Q1 – 2009Q3 Note: Shaded areas are recessions . 4 Saving Identities (continued) S PUB = T - (G + Tr) (4) • S PUB = Public Saving = Tax revenue less government spending • Includes Federal, State and Local Saving So TOTAL NATIONAL SAVINGS is given by: S = S PR + S PUB = Y - T + Tr – C + T - (G + Tr)= Y - C – G (5) • S = National Savings = the portion of national income that is not used for consumption or government purchases So S = Y - C – G (6) VERY IMPORTANT CONCLUSION: S = I + NX Combine (6) and Y = C+I+G+NX (7) 5 Summary S = I + NX We will basically use this equation (or a variation of it) for the rest of the course!...
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ch13_savingmath(2) - The math behind savings Step by step 2...

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