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Chapter 8.docx

Course Code
ECN 204
Eric Kam

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Chapter 8: Saving, Investment and the Financial System
Financial system: group of institutions that helps match the saving of one person with the investment of
Financial markets: institutions through which savers can directly provide funds to borrowers. Examples:
- The Bond Market. Bond is a certificate of indebtedness
- The Stock Market. Stock is a claim to partial ownership in a firm
Financial intermediaries: institutions through which savers can indirectly provide funds to borrowers; eg
- Banks
- Mutual funds: institutions that sell shares to the public and use the proceeds to buy portfolios of
stocks and bonds
Saving and Investment in the National Income Accounts
- GDP is both total income in an economy and total expenditure on the economy’s output of g&s
- Y = C + I + G + NX
- In closed economy: Y = C + I +G
Different Kinds of Saving
Private saving: portion of households’ income that is not used for consumption or paying taxes
= Y T C
Public saving: Tax revenue less government spending
= T G
National Saving
- Private saving + public saving
= (Y T C) + (T G)
= Y C G
= the portion of national income that is not used for consumption or gov’t purchases
Saving and Investment
Y = C + I + G
Solve for I:
I = Y C G = (Y T C) + (T G)
Saving = investment in a closed economy
Budget surplus
- Excess of tax revenue over govt spending
= T G
- Public saving
Budget deficit
- Shortfall of tax revenue from gov’t spending
= G T = -(public saving)
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