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Lecture 4

Lecture Four: Finance, Savings and Investments

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ECON 1010
Xueda Song

Lecture Four Finance Saving and InvestmentJanuary 31 2012Financial Institutions and Financial MarketsTo study the economics of financial institutions and markets we distinguish betweenFinance and MoneyPhysical Capital and Financial CapitalFinance and MoneyThe study of finance looks at how households and firms obtain and use financial resources and how they cope with the risks that arise in this activityThe study of money looks at how households and firms use money how much of it they hold how banks create and manage it and how its quantity influences the economyPhysical Capital and Financial CapitalPhysical capital is the tools instruments machines buildings and other items that have been produced in the past and that are used today to produce goods and servicesThe funds that firms use to buy physical capital are called financial capitalThe purchasing of physical capital can be considered a type of investmentCapital and InvestmentGross investment is the total amount spent on purchases of new capital and on replacing depreciated capitalDepreciation is the decrease in the quantity of capital results from wear and tear as well as well as obsolescenceNet investment is the change in the quantity of capitalNet investmentgross investmentdepreciationRelationships Between Capital Gross Investment Depreciation and Net Investment
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