Matching Up Savings and InvestmentAccording to the savings–investment spending identity, savings and investment spending are always equal for the economy as a whole.
SSPRIVATEPRIVATE=GDP+TR-T-C=GDP+TR-T-C
SSGOVERNMENGOVERNMEN=T-TR-G=T-TR-GNS= SNS= SPRIVATPRIVAT+ S+ SGOVERNMEGOVERNME
NS=(GDP+TR-T-C)+(T-TR-G)NS=(GDP+TR-T-C)+(T-TR-G)
NS=GDP-C-GNS=GDP-C-G
Closed Economy AlgebraGDP = C + I + GI = GDP - C - G
I = NSI = NS
Investment = National Investment = National SavingSaving
NS= SNS= SPRIVATPRIVAT+ S+ SGOVERNMEGOVERNME
I = NSI = NSInvestment spending is equal to private saving plus the budget balance (Government Saving)
Governments Saving / DissavingThe budget balance is the difference between tax revenue and government spending.
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.
National Saving
NS = SNS = SPRIVAT PRIVAT + S+ SGOVERNMENTGOVERNMENT
National savings, the sum of private savings plus the budget balance, is the total amount of savings generated within the economy.
Closed EconomyIn a closed 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
The Savings–Investment Spending Identity in an Open Economy
I = SPrivate + SGovernment + (IM − X) = NS + KI
Investment spending = National savings + Capital inflow in an open economy
Capital InflowCapital InflowCapital Inflow-Net inflow of funds into a country
Capital Inflow EqualsEquals
InflowInflow of Foreign funds minusminus
OutflowOutflow of Domestic funds
Capital Inflow can be Negative
Open Economy Algebra
KI = IM - XKI = IM - X
I = (GDP - C - G) + (IM - X)I = (GDP - C - G) + (IM - X)I = SI = SPrivatePrivate + S + SGovernmentGovernment + (IM − X) + (IM − X)
I = NS + KII = NS + KI
Inflows Good or Bad?Investment spending eventualy have to be repaidIf financed by domestic saving it is repaid into the economyIf financed by Capital Inflow it is repaid out of the economyThink back to Chapter 8 There are positive side effects too!
Financial Markets
Financial Markets channel the saving of households to business for Investment spending
Market for Loanable fundsThe loanable funds market is a hypothetical market that examines the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders.
The interest rate is the price, calculated as a percentage of the amount borrowed, charged by the lender to a borrower for the use of their savings for one year.
Rate of Return
The rate of return of a project is the profit earned on the project expressed as a percentage of its cost.
Savings, Investment Savings, Investment Spending, and Government Spending, and Government PolicyPolicy
Quantity of private loanable funds demanded falls