chapter 7 savings and investment process © 2000 john wiley & sons, inc
TRANSCRIPT
Chapter 7
Savings and Investment Savings and Investment ProcessProcess
© 2000 John Wiley & Sons, Inc.
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Chapter Outcomes
Identify and briefly describe the major components of the gross domestic product
Describe how the balance between exports and imports affects the gross domestic product
Discuss the link between gross private domestic investment and gross savings in the United States
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Chapter Outcomes(Continued)
Briefly describe the historical role of savings in the United States
Describe how financial assets and liabilities are created
Indicate the scope and magnitude of the federal budget and identify the principal sources of revenues and expenditures
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Chapter Outcomes(Concluded)
Explain the nature of federal government borrowing and describe recent trends in borrowing
Identify the major sources of savings in the United States
Explain how funds flow from savings into investments
Identify and describe the factors that affect savings
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Gross Domestic Product (GDP) and Capital Formation
GROSS DOMESTIC PRODUCT:GROSS DOMESTIC PRODUCT: GDP is a nation’s output of goods and services for a specified time
CAPITAL FORMATION:CAPITAL FORMATION: Process of constructing residential and nonresidential structures, manufacturing producers’ durable equipment, and increasing business inventories
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Gross Domestic Product (GDP) Components
EQUATION:EQUATION: GDP = PCE + GP + GPDI + NE
PERSONAL CONSUMPTION PERSONAL CONSUMPTION EXPENDITURES (PCE):EXPENDITURES (PCE): Expenditures by individuals for durable goods, nondurable goods, and services
GOVERNMENT PURCHASES (GP):GOVERNMENT PURCHASES (GP): Purchases of goods and services by the government
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Gross Domestic Product (GDP) Components (Continued)
EQUATION:EQUATION: GDP = PCE + GP + GPDI + NE
GROSS PRIVATE DOMESTIC GROSS PRIVATE DOMESTIC INVESTMENTS (GPDI):INVESTMENTS (GPDI): Investments in residential and nonresidential structures, producers’ durable equipment, and business inventories
NET EXPORTS (NE):NET EXPORTS (NE): Exports minus imports of goods and services
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Capital Consumption Allowances
CAPITAL CONSUMPTION ALLOWANCES DEFINED: Estimates of the “using up,” or depreciation of, plant and equipment assets for business purposes
IMPORTANCE: Capital consumption allowances represent the primary source of annual savings
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Creation of Financial Assets and Liabilities
INDIVIDUALS
COMMERCIAL BANK
BUSINESS FIRM
Real Assets
Financial Assets: Time Deposits
Financial Liabilities
Owners’ Equity
Real Assets
Financial Assets: Business Loan
Financial Liabilities:Time Deposits
Owners’ Equity
Real Assets
Financial Assets
Financial Liabilities:Business Loan
Owners’ Equity
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Creation of Financial Assets and Liabilities
REAL ASSETS: Includes ownership of land, buildings, machinery, inventory, commodities, and precious metals
FINANCIAL ASSETS: Claims in the form of obligations or liabilities issued by individuals, businesses, financial intermediaries, and governments
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Economic Units: Savings Surplus Versus Savings Deficit
ECONOMIC UNIT: Governments, businesses, or individuals taken as a group
SAVINGS: Occurs when all of an economic unit’s income is not consumed but held in the form of cash and other financial assets
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Economic Units: Savings Surplus Versus Savings Deficit
(Continued) SAVINGS SURPLUS:
Occurs when current income exceeds investment in real assets
SAVINGS DEFICIT: Occurs when investment in real assets exceeds current income
IMPORTANCE OF INDIVIDUALS: Individuals represent an important savings surplus economic unit
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Creation of Financial Assets and Liabilities
Process:
--Individuals place their savings in time deposit accounts at a bank
--The bank lends some of the deposits to a business firm
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Creation of Financial Assets and Liabilities (Continued)
Result:
--Time deposits become financial assets of savers and financial liabilities to the bank
--The business loan is a bank’s financial asset and the business firm’s financial liability
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Two Types of Financing
DIRECT FINANCING: Involves use of securities that represent specific contracts between the savers and borrowers themselves
INDIRECT FINANCING: Financing created by an intermediary that involves separate instruments with lenders and borrowers
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Federal Government Dollar:Fiscal Year 1999
WHERE IT COMES FROM:
--Individual income taxes (46%)
--Social insurance receipts (34%)
--Corporate income taxes (11%)
--Excise taxes (4%)
--Other (5%)
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Federal Government Dollar:Fiscal Year 1999 (Continued)
WHERE IT GOES:
--Direct benefit payments for individuals (50%)
--Grants to states and localities (15%)
--National defense (15%)
--Net interest (14%)
--Other federal operations (5%)
--Reserve pending social security reform (1%)
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Federal Budget Concepts OFF-BUDGET OUTLAYS:
Funding for some government agencies that is not included in the federal budget
BUDGETARY DEFICIT: Occurs when expenditures are greater than revenues
FEDERAL STATUTORY DEBT LIMITS: Limits on the federal debt set by Congress
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Two Types of Personal Savings
VOLUNTARY SAVINGS:VOLUNTARY SAVINGS: Financial assets set aside for future use
CONTRACTUAL SAVINGS:CONTRACTUAL SAVINGS: Savings accumulated on a regular schedule by prior agreement (e.g., reserves in insurance and pension plans)
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Personal Savings in the U.S.
PERSONAL SAVINGS DEFINITION:PERSONAL SAVINGS DEFINITION: Personal income Less: taxes and other payments Equals: disposable personal income Less: personal outlays Equals: personal savings
SAVINGS RATE DEFINITION:SAVINGS RATE DEFINITION: Savings Rate = (Personal Savings)/ (Disposable Personal Income)
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Types of Personal Savings
Cash balances Time and savings deposits Insurance reserves and pension
funds Securities
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Corporate Savings in the U.S.
UNDISTRIBUTED PROFITS DEFINITION: Profits before taxes Less: tax liabilities Equals: profits after taxes Less: dividends Equals: undistributed profits
RETENTION RATE DEFINITION: Retention Rate = (Undistributed Profits)/(Profits After Taxes)
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Lending in the Credit Markets: Financial Intermediation Sources
Commercial banks Thrift institutions Insurance and pension funds Other financial intermediaries
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Sources of Funds Raised in the Credit Markets:
By Borrowing Sector U.S. government State and local governments Households Farms Nonfarm noncorporate Corporate
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Sources of Funds Raised in the Credit Markets: By Instrument
U.S. government securities Tax-exempt obligations Corporate bonds Mortgages Consumer debt Bank loans Other debt
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Factors Affecting Savings
Levels of income Economic expectations Economic cycles Life stages of the individual saver Life stages of the corporation