chapter 26 saving investment
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Macro Economy, Mankiw, Chapter 26 Saving Investment SlideshowTRANSCRIPT
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2626Saving, Investment,
and the FinancialSystem
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The Financial System
• The financial systemfinancial system consists of the group of
institutions in the economy that help to match
one person’s saving with another person’s
investment.• It moves the economy’s scarce resources from
savers to borrowers.
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FINANCIAL INSTITUTIONS IN THEU.S. ECONOMY
• The financial system is made up of financial
institutions that coordinate the actions of savers
and borrowers.
• Financial institutions can be grouped into two
different categories: financial markets and
financial intermediaries.
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FINANCIAL INSTITUTIONS IN THEU.S. ECONOMY
• Financial Markets
• tock Market
• !ond Market
• Financial Intermediaries
• !anks
• Mutual Funds
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FINANCIAL INSTITUTIONS IN THEU.S. ECONOMY
• Financial markets are the institutions through
which savers can directly provide funds to
borrowers.
• Financial intermediaries are financial
institutions through which savers can indirectly
provide funds to borrowers.
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Financial Markets
• The !ond Market
• " bond is a certificate of indebtedness that
specifies obligations of the borrower to
the holder of the bond.• #haracteristics of a !ond
• Term: The length of time until the bond matures.
• Credit Risk : The probability that the borrower will fail to
pay some of the interest or principal.
• Tax Treatment : The way in which the ta$ laws treat the
interest on the bond.• Municipal bonds are federal ta$ e$empt.
I!
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Financial Markets
• The tock Market
• Stock represents a claim to partial ownership in a
firm and is therefore% a claim to the profits that the
firm makes.• The sale of stock to raise money is called equity
financing.
• #ompared to bonds% stocks offer both higher risk and
potentially higher returns.
• The most important stock e$changes in the &nited
tates are the 'ew (ork tock )$change% the
"merican tock )$change% and '"*"+.
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Financial Markets
• The tock Market
• Most newspaper stock tables provide the following
information:
• ,rice -of a share• /olume -number of shares sold
• *ividend -profits paid to stockholders
• ,rice0earnings ratio
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Financial Intermediaries
• Financial intermediaries are financial
institutions through which savers can indirectly
provide funds to borrowers.
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Financial Intermediaries
• !anks
• take deposits from people who want to save and use
the deposits to make loans to people who want to
borrow.• pay depositors interest on their deposits and charge
borrowers slightly higher interest on their loans.
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Financial Intermediaries
• !anks
• !anks help create a medium of exchange by
allowing people to write checks against their
deposits.• " medium of e$changes is an item that people can easily
use to engage in transactions.
• This facilitates the purchases of goods and services.
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Financial Intermediaries
• Mutual Funds
• " mutual fund is an institution that sells shares to
the public and uses the proceeds to buy a portfolio%
of various types of stocks% bonds% or both.• They allow people with small amounts of money to
easily diversify.
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Financial Intermediaries
• 1ther Financial Institutions
• #redit unions
• ,ension funds
• Insurance companies
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SAVIN AN! INVESTMENT IN THENATIONAL INCOME ACCOUNTS
• 2ecall that 3*, is both total income in an
economy and total e$penditure on the
economy’s output of goods and services:
( 4 # 5 I 5 3 5 '6( 4 # 5 I 5 3 5 '6
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S"me Im#"rtant Identities
• "ssume a closed economyclosed economy 7 one that does not
engage in international trade:
( 4 # 5 I 5 3( 4 # 5 I 5 3
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S"me Im#"rtant Identities
• 'ow% subtract # and 3 from both sides of the
e8uation:
( 7 # 7 3 4I( 7 # 7 3 4I
• The left side of the e8uation is the total income
in the economy after paying for consumption
and government purchases and is called
national saving, or 9ust saving (S.
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S"me Im#"rtant Identities
• ubstituting S for ! " C " #% the e8uation can be
written as:
S $ % S $ %
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S"me Im#"rtant Identities
• 'ational saving% or saving% is e8ual to:
S $ % S $ %
S $ ! & C & #S $ ! & C & #
S $ (! & T & C ' (T & #S $ (! & T & C ' (T & #
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The Meanin$ "% Sa&in$ and In&estment
• 'ational aving
• ational saving is the total income in the economy
that remains after paying for consumption and
government purchases.• ,rivate aving
• )rivate saving is the amount of income that
households have left after paying their ta$es and paying for their consumption.
)rivate saving $ (! & T & C )rivate saving $ (! & T & C
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The Meanin$ "% Sa&in$ and In&estment
• ,ublic aving
• )ublic saving is the amount of ta$ revenue that the
government has left after paying for its spending.
)ublic saving $ (T & # )ublic saving $ (T & #
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The Meanin$ "% Sa&in$ and In&estment
• urplus and *eficit
• If T * #% the government runs a budget sur+lus
because it receives more money than it spends.
• The surplus of T " # represents public saving.• If # * T % the government runs a budget deficit
because it spends more money than it receives in
ta$ revenue.
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The Meanin$ "% Sa&in$ and In&estment
• For the economy as a whole% saving must be
e8ual to investment.
S $ % S $ %
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THE MA'(ET FO' LOANA)LEFUN!S
• Financial markets coordinate the economy’ssaving and investment in the market formarket for
loanable funds.loanable funds.
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THE MA'(ET FO' LOANA)LEFUN!S
• The market for loanable funds is the market inwhich those who want to save supply funds and
those who want to borrow to invest demand
funds.
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THE MA'(ET FO' LOANA)LEFUN!S
• oanable fundsoanable funds refers to all income that peoplehave chosen to save and lend out% rather than
use for their own consumption.
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S*##ly and !emand %"r L"ana+le F*nds
• The supply of loanable funds comes from people who have e$tra income they want to
save and lend out.
• The demand for loanable funds comes fromhouseholds and firms that wish to borrow to
make investments.
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S*##ly and !emand %"r L"ana+le F*nds
• The interest rate is the price of the loan.
• It represents the amount that borrowers pay for
loans and the amount that lenders receive on
their saving.
• The interest rate in the market for loanable
funds is the real interest rate.
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S*##ly and !emand %"r L"ana+le F*nds
• Financial markets work much like othermarkets in the economy.
• The e8uilibrium of the supply and demand for
loanable funds determines the real interest rate.
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Fi$*re , The Market %"r L"ana+le F*nds
"oana#le Funds
$in #illions o% dollars&
-
Interest
'ate S*##ly
!emand
/
0,12--
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S*##ly and !emand %"r L"ana+le F*nds
• 3overnment ,olicies That "ffect aving andInvestment
• Ta$es and saving
• Ta$es and investment
• 3overnment budget deficits
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3"licy ,4 Sa&in$ Incenti&es
• Ta$es on interest income substantially reducethe future payoff from current saving and% as a
result% reduce the incentive to save.
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3"licy ,4 Sa&in$ Incenti&es
• " ta$ decrease increases the incentive forhouseholds to save at any given interest rate.
• The supply of loanable funds curve shifts to the
right.• The e8uilibrium interest rate decreases.
• The 8uantity demanded for loanable funds
increases.
Fi 2 A I i th S l % L +l
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Fi$*re 2 An Increase in the S*##ly "% L"ana+leF*nds
"oana#le Funds
$in #illions o% dollars&
-
Interest
'ate
S*##ly1 S , S 2
2. . . . 5hichred*ces thee6*ili+ri*minterest rate . . .
7. . . . and raises the e6*ili+ri*m6*antity "% l"ana+le %*nds.
!emand
,. Ta8 incenti&es %"r sa&in$ increase the
s*##ly "% l"ana+le%*nds . . .
/
0,12--
9/
0,1:--
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3"licy ,4 Sa&in$ Incenti&es
• If a change in ta$ law encourages greatersaving% the result will be loer interest rates
and greater investment.
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3"licy 24 In&estment Incenti&es
• "n investment ta$ credit increases the incentiveto borrow.
• Increases the demand for loanable funds.
• hifts the demand curve to the right.
• 2esults in a higher interest rate and a greater
8uantity saved.
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3"licy 24 In&estment Incenti&es
• If a change in ta$ laws encourages greaterinvestment% the result will be higher interest
rates and greater saving.
Fi$*re 7 An Increase in the !emand %"r
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Fi$*re 7 An Increase in the !emand %"rL"ana+le F*nds
"oana#le Funds
$in #illions o% dollars&
-
Interest
'ate ,. An in&estment
ta8 credit
increases the
demand %"r
l"ana+le %*nds . . .
2. . . . 5hich
raises the
e6*ili+ri*m
interest rate . . .
7. . . . and raises the e6*ili+ri*m
6*antity "% l"ana+le %*nds.
S*##ly
!emand1 D,
D2
/
0,12--
:/
0,19--
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3"licy 74 "&ernment )*d$et !e%icits andS*r#l*ses
• ;hen the government spends more than itreceives in ta$ revenues% the short fall is called
the budget deficit .
• The accumulation of past budget deficits iscalled the government debt.
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3"licy 74 "&ernment )*d$et !e%icits andS*r#l*ses
• 3overnment borrowing to finance its budgetdeficit reduces the supply of loanable funds
available to finance investment by households
and firms.• This fall in investment is referred to as
croding out .
• The deficit borrowing crowds out private borrowerswho are trying to finance investments.
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3"licy 74 "&ernment )*d$et !e%icits andS*r#l*ses
• " budget deficit decreases the supply ofloanable funds.
• hifts the supply curve to the left.
• Increases the e8uilibrium interest rate.• 2educes the e8uilibrium 8uantity of loanable funds.
Fi$*re 94 The E%%ect "% a "&ernment )*d$et
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Fi$*re 94 The E%%ect "% a "&ernment )*d$et!e%icit
"oana#le Funds
$in #illions o% dollars&
-
Interest
'ate
7. . . . and red*ces the e6*ili+ri*m6*antity "% l"ana+le %*nds.
S 2
2. . . . 5hich
raises the
e6*ili+ri*m
interest rate . . .
S*##ly1 S ,
!emand
0,12--
/
0;--
:/,. A +*d$et de%icit
decreases the
s*##ly "% l"ana+le
%*nds . . .
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3"licy 74 "&ernment )*d$et !e%icits andS*r#l*ses
• ;hen government reduces national saving byrunning a deficit% the interest rate rises and
investment falls.
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3"licy 74 "&ernment )*d$et !e%icits andS*r#l*ses
• " budget surplus increases the supply ofloanable funds% reduces the interest rate% and
stimulates investment.
Fi$*re The U S "&ernment !e+t
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Fi$*re The U.S. "&ernment !e+t
(ercent
o% )*(
,<=- ,;,- ,;7- ,;- ,;<- ,;=- ,=,- ,=7- ,=- ,=<- ,==-
'e&"l*ti"nary>ar
2-,-
Ci&il>ar >"rld >ar I
>"rld >ar II
-
2-
9-
:-
;-
,--
,2-
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S*mmary
• The &.. financial system is made up offinancial institutions such as the bond market%
the stock market% banks% and mutual funds.
• "ll these institutions act to direct the resourcesof households who want to save some of their
income into the hands of households and firms
who want to borrow.
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S*mmary
• 'ational income accounting identities revealsome important relationships among
macroeconomic variables.
• In particular% in a closed economy% nationalsaving must e8ual investment.
• Financial institutions attempt to match one
person’s saving with another person’sinvestment.
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S*mmary
• The interest rate is determined by the supplyand demand for loanable funds.
• The supply of loanable funds comes from
households who want to save some of theirincome.
• The demand for loanable funds comes from
households and firms who want to borrow forinvestment.
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S*mmary
• 'ational saving e8uals private saving plus public saving.
• " government budget deficit represents
negative public saving and% therefore% reducesnational saving and the supply of loanable
funds.
• ;hen a government budget deficit crowds outinvestment% it reduces the growth of
productivity and 3*,.