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EC140 (417)

EC140 4.docx

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Justin Smith

thEC140February 26 2013 Finance Saving and Investment Disposable income is split between savings and consumption Total income can either be saved consumed or spent on taxesDisposable incometotal incometaxesSITGMX Private saving minus investmentgovernment savingforeign saving equals 0 Equilibrium one sectors savinganother sectors borrowing If TG0the government is borrowing from either private individuals or the private sectorISTGMX MXcurrent account deficit represents foreign lending in Canada Finance the activity of providing funds that generate expenditure on capital goodsMoney The medium of exchange used to pay for goods and services and to settle financial transactionsIn this section we will study financeIn later chapters we will study moneyPhysical capital tools instruments machines buildings etc produced in the past and used today to produce other goods and servicesFinancial Capital Funds that firms use to buy physical capital Capital and InvestmentGross investment spending on purchases of new capital and on replacing depreciated capitalDepreciation the decrease in the quantity of capital that results from wear and tear and obsolescenceNet investment the change in the quantity of capitalNet investmentGross investmentDepreciationFirm starts with 30 in capital at beginning of 201120 depreciates during 2011Investment in new capital is 30 during 2011Net investment in 2011 the increase in capital during the year NI302010So at end of year total capital stock is 40 1thEC140February 26 2013 Wealth the value of all the things that people own Counts things like all money in bank accounts value of assets like cars equity in your home etcNot the same as incomeSaving the amount of income that is not paid in taxes or consumed Wealth increases withSavingCapital Gains an increase in the value of assets held Markets for Financial CapitalSaving is important because it is the source of funds used to finance investment in capitalFinancial markets help link saving with investment so serve a key role in economicsThese funds are supplied by savers and demanded by investors in three types of financial marketsLoan marketsBond marketsStock markets Loan MarketMarket where one party lends money to another partyUsed mainly by consumers and sometimes business ownersLoans can be obtained from banks credit unions wealthy individuals credit cards etcLoans are paid back with interest over timeSometimes loans are secured by collateralie borrower agrees to give the lender an asset in case of defaultWhen house used as collateral this is a mortgage loan Bond Market 2
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