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Lecture 4

MGEB06H3 Lecture Notes - Lecture 4: Government Budget Balance, Capital Outflow, Autarky

Economics for Management Studies
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Iris Au

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Macroeconomics Notes: Lecture Four (Chapter Ten)PART1:
Matching Up Savings and Investment Spending:
Psychical and human capital play an important part in determining long run economic
In Canada human capital is largely provided by the government through public education
Physical capital, except infrastructure (Transportation, communication, sewage, water
and electric systems), is mostly created by private investment spending (spending by
firms and households).
The Savings-Investment Spending Identity:
Savings and investments spending are always equal for the economy as a whole,
This is true because the GDP is equal to total spending on domestically produced final
goods and services.
The Savings-Investment Spending Identity in a Closed Economy:
A closed economy is an economy that does not trade with foreigners. No exports or
Example, North Korea
The equation for nations income identity in a closed economy is
GDP = Y = C + I + G
Total income Total spending by all sectors in the economy
The economy can divide total income into two categories: Spending and Savings
Nations savings is the total amount of domestic savings generates with in the economy.
National savings is the amounts of output not devoted to current consumption
SNational = Y C G
=GDP-Consumption-Government Spending
National savings come from 2 sources:
1) Private savings, SPrivate > savings done by the households. Private saving is saving by
household and businesses.
SPrivate = [Output (Y) Taxes (T) + Transfers (TR)] Consumption (C)
SPrivate = Y T + TR C
2) Public savings, SPublic savings by all levels of government. Public saving is the saving
by the government.
SPublic = Taxes (T) Transfers (TR) Government spending on final goods & services (G) =
Government budget balance (GBB)
SPublic = T TR G = GBB
***If the public saving is positive (GBB>0) = Budget Surplus
***If the public saving is negative (GBB<0) = Budget Deficit
***If the public saving is zero (GBB=0) = Balance Budget
For a closed economy, the only way for a country to save is to build up capital stock (i.e.
undertake investment).
Y = C + I + G
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