Econ+102+lecture+10%2C+2-9-12+-+Savings+and+investment copy

# Econ+102+lecture+10%2C+2-9-12+-+Savings+and+investment copy...

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Lecture 10: Ch. 10  – Savings and Investment Econ 102, Winter 2012 2/9/2012 1 Required reading : Ch 10: pp. 257- 270 (skip “The Financial System”)

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Outline 1. The savings-investment identity Complex version: trade and government 2. The market for loanable funds a. Nominal interest rate b. Equilibrium short-run investment c. Mathematical representation d. Shifters 3. Fisher effect: real vs nominal interest 2/9/2012 2
Savings and Investment Ch. 10 is a transitional chapter between LR and SR models Investment (I) is a central element of economic growth Investment is also the most volatile component of the aggregate expenditure identity, and is a major source of SR fluctuations We will discuss today the first component of our SR model: savings and investment decisions. The S=I identity 2/9/2012 3

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Savings and Investment By simple national income accounting, savings (S) must equal investment Took it “on faith” in growth model: all savings become investment. But why? Note that capital S here = sY from last class: total savings equals income times the savings rate For now, assume a very simple economy: No government EX = IM = NX = 0 no international trade Then it must be that total income (Y) equals total spending (GDP) 2/9/2012 4
Savings and Investment What are the components of each side of the equation Y = GDP? 1. National Income Y = C + S Households do one of two things with their income: spend it or save it An identity; if it’s not spent (on consumption), it must have been saved (i.e., not spent) 2. Aggregate expenditure: GDP = C + I But we assumed G = 0 and NX = 0 + G + NX 2/9/2012 5

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Savings and Investment Combined: Y = GDP  C + S = C + I S = I In this simple economy, the statement that “income is spending” is identical to the statement that “savings is investment” An identity (a definition), not a theory Is this example “too simple”? No, similar statements 2/9/2012 6
Savings and Investment, expanded Let government spending G ≠ 0 Government can spend on goods and services, make money transfers to HHs, and is funded by taxation T = total tax revenues, taken from households TR = total transfers from government to households Now households split their income between consumption, taxes, and savings Define private (HH) savings = Sp Y + TR = C + T + Sp Aggregate expenditure now includes G. GDP = C + I + G or, Y = C + (T – TR) + Sp “Net taxes” 2/9/2012 7

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Savings and Investment, expanded Now, with government, “spending = income” implies Y = GDP C + (T - TR) + Sp = C + I + G Sp + (T – TR – G) = I “Total investment equals the sum of private savings Sp plus government savings
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Econ+102+lecture+10%2C+2-9-12+-+Savings+and+investment copy...

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