Saving and Investment

Chapter 6

2

Consumption and GDP in the United StatesPanel A

Per

cen

tage

dev

iati

on

from

tre

nd

-20

-10

0

10

20

Time1955’60 ’65 ’70 ’75 ’80 ’85 ’90

GDP ConsumptionFigure 6.1A

©1999 South-Western College Publishing

3

Investment and GDP in the United StatesPanel B

Per

cen

tage

dev

iati

on

from

tre

nd

-20

-10

0

10

20

Time1955 ’60 ’65 ’70 ’75 ’80 ’85 ’90

GDP InvestmentFigure 6.1B

©1999 South-Western College Publishing

4

How Smooth is Consumption?

GDP Consumption Investment

Standard Deviation

Standard Deviation relative to GDP

2.58 2.58 2.58

1.00 0.76 3.34

Table 6.1©1999 South-Western College Publishing

5

Investment ConsumptionCurrent Income

Fu

ture

In

com

e

E

O

D

A

The Intertemporal Production Possibilities Set

Figure 6.2

B

©1999 South-Western College Publishing

6

InvestmentI (Investment today)

Y (

Val

ue

of c

omm

odit

ies

pro

du

ced

tom

orro

w)

OI1

Maximizing Profits

321

Figure 6.3

Y1

©1999 South-Western College Publishing

7

I (Investment)

Y (

Ou

tpu

t)

O IA

Panel A

YA

A

Slope (1 + rA)

Figure 6.4A

A

©1999 South-Western College Publishing

Deriving the Investment Demand Curve

8I (Investment)

Y (

Ou

tpu

t)

O IB

Panel B

B

YB B

Slope (1 + rB)

Figure 6.4B

©1999 South-Western College Publishing

Deriving the Investment Demand Curve

9I (Investment)

r (R

eal e

stat

e in

tere

st)

0 IA

Panel C

rA

rB

Investment demand curve

Figure 6.4C

IB

©1999 South-Western College Publishing

Deriving the Investment Demand Curve

10

Fu

ture

con

sum

pti

on

Present consumption

Consumption Saving(Y1 - C1)

C2

Y2

C1 Y1

A

E

Maximizing Utility Over Time

Figure 6.5

U1

U2

U3

(1+r)

©1999 South-Western College Publishing

11

Fu

ture

con

sum

pti

on

Present consumption

Y2

Y1SA

AE

Slope (1 + rA)

Panel ADeriving the Saving Supply Curve

Figure 6.6A©1999 South-Western College Publishing

12

Fu

ture

con

sum

pti

on

Present consumption

Y2

Y1SB

B

ESlope (1 + rB)

Panel B

Figure 6.6B©1999 South-Western College Publishing

Deriving the Saving Supply Curve

13

Saving

Panel Cr

(Rea

l in

tere

st r

ate)

rA

rB

SA SB0Figure 6.6C

©1999 South-Western College Publishing

Deriving the Saving Supply Curve

14Saving and investment

Saving and Investment in a Closed Economyr

(Rea

l in

tere

st r

ate)

r1

rE

S1

0

Figure 6.7

IE = SE

I1

Savingsupply curve

Investment demand curve

©1999 South-Western College Publishing

15Investment

Ou

tpu

t

O I1(r1)

Panel A

Y2

Y1

Slope (1 + r1)

Figure 6.8A

I2(r1)

Production function2

Production function1

©1999 South-Western College Publishing

Productivity and the Investment Demand Curve

16Saving and investment

Productivity and Investment DemandPanel B

r (R

eal i

nte

rest

rat

e)

r1

r2

0

Figure 6.8B

I1

Savingsupply curve

Investment demand curve2

I2

Investment demand curve1

(r1) (r2) I1 (r1)

©1999 South-Western College Publishing

17Saving and investment

Saving and the Baby BoomPanel A

r (R

eal i

nte

rest

rat

e)

r2

r1

0

Box 6.2A

I1

Saving supplyin 1939

Investment demand

I2

Saving supply in 1970

©1999 South-Western College Publishing

18Saving and investment

Saving and the Baby BoomPanel B

r (R

eal i

nte

rest

rat

e)

r2

r1

0

Box 6.2B

I1

Saving supply curve in 2020

Investment demand curve

I2

Saving supply curve in 1990

©1999 South-Western College Publishing

19

Government Debt and Pension Liabilities as Percent of GDP in 1990

Canada

Germany

52 121

22 157

Table 6.3

Net Conventional Debt

Net Pension Liabilities

Italy

United Kingdom

United States

100

27

35

259

156

90

Source: Max Alier, Essays on pension reform, Ph.D. thesis, UCLA, 1997.

©1999 South-Western College Publishing

20

Domestic Saving and investment

Saving and Investment in an Open EconomyPanel A

r (R

eal i

nte

rest

rat

e)

r1

r2

I2TOT

0

Figure 6.9A

I1TOT

Savingsupply curve

Investmentdemand curve

S1TOT S2

TOT

NB1 > 0

NB2 < 0

©1999 South-Western College Publishing

21

Quantities of capital demanded and suppliedNB2 O NBE NB1

r (W

orld

rea

l in

tere

st r

ate)

rE

r1

r2

A

BC

World supply of capital to the U.S.

U.S. demand for capital from the world

Figure 6.9B©1999 South-Western College Publishing

Saving and Investment in an Open EconomyPanel B

22

Real interest rate Trade surplusBudget deficit

Budget Deficit and Trade SurplusPanel A

Per

cen

tage

of

GD

P

1970 ’73 ’76 ’79 ’82 ’85 ’88 ’91 ’94-6-4-2 0 2 4 6 810

Figure 6.10A

©1999 South-Western College Publishing

23Quantities of capital demanded and supplied

r(World real interest rate)

rA

rB

0

Figure 6.10B

World supply of capital to the U.S.

U.S. demand for capital2

NBA

U.S. demand for capital1

B

A

NBB

©1999 South-Western College Publishing

Panel B

END