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Economics A100 Lecture Notes - Lecture 20: Loanable Funds, Autarky, Demand Curve

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School
Orange Coast College
Department
Economics
Course
Economics A100
Professor
Tierney

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Document Summary

Saving and investment in the national income accounts: Accounting: how various numbers are defined and added up. Important identities to national income accounting (accounting for the economy as a whole): Y = c + i + g + nx. Now, were going to assume it"s a closed economy, meaning it doesn"t interact with other economies (does not engage in trade or international borrowing and lending), in this case . Y = c + i + g. Y c g = i. The left side is the total income of the economy that remains after paying for consumption and government purchases; called national saving, or saving, which is. Now, let t = the amount that the government collects from households in taxes minus the amount it pays back to households in the form of transfer payments (like ss and welfare), now . S = (y t c) + (t g) ; this equation separates private and public savings.

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Related Questions

5. Saving and net flows of capital and goods In a closed economy, saving and investment must be equal, but this is not the case in an open economy. In the following problem, you will explore how saving and investment are connected to the international flow of capital and goods in an economy. Before delving into the relationship between these various components of an economy, you will be asked to recall some relationships between aggregate variables that will be useful in your analysis. Recall the components that make up GDP. National income (Y) equals total expenditure on the economy's output of goods and services. Thus, where C = consumption, I = investment, G = government purchases, X = exports, M = imports, and NX = net exports: Y = Also, national saving is the income of the nation that is left after paying for . Therefore, national saving (S) is defined as: S = Rearranging the previous equation and solving for Y yields Y = . Plugging this into the original equation showing the various components of GDP results in the following relationship: S = This is equivalent to S = , since net exports must equal net capital outflow (NCO, also known as net foreign investment). Now suppose that a country is experiencing balanced trade. Determine the relationships between the entries in the following table, and enter these relationships using the following symbols: > (greater than), < (less than), or = (equal to). Outcomes of Balanced Trade Imports Exports 0 Net Exports Y C+I+G Investment Saving Net Capital Outflow 0

Question 1 Assume a small scale French farmer sells 100,000 lbs. of milk to a French intermediary company for €2.00 per lbs. The intermediary company package the milk in fancy containers and sells it to Danone for €3.50 per lbs. Danone uses the milk to produce yogurt in its plant in Seville, Spain, Total output will be 6000 container and each container of yogurt for €5.75. How will this string of transactions affect French GDP? How will it affect French GNP? How will it affect Spanish GNP and GDP? Which will be more reflective of the true output for each economy? Explain

Question 2

Consider an open economy described by the following equations (all figures in millions of dollars): Y = C + I + G + NX Y = 8,000 (current value of output) G = 2,000 T = 1,000 + .1(Y) C = 450 + 0.75 (Y – T) I = 2,000 – 40 r NX = 700- 600ɛ (ɛ is the exchange rate) r = r* = 5 a) What is the current state of this economy in term of national saving, investment, the trade balance and the equilibrium exchange rate? b) Suppose government approve an infra structure investment which raises G to 2,250. How would this increase impact what you have calculated in (a) above? c) Now suppose that the world interest rate rises from 5 to 10 percent (G is again 2,000). Would the change in interest have the same impact on National saving and investment? Does it impact the exchange rate? Explain

Assume the following values of an economy.

Planned Investment (Ip) = $20

Autonomous Consumption (C ) = $30

Marginal Propensity to consume (MPC) = .9

What is the equilibrium income?

Y* = aggregate demand at the equilibrium level. (Consumption + investment)

Consumption function = autonomous consumption + mpc * Y.

C=30 + .9Y

AD = 30 + .9Y + 20 = 50 + .9Y

Y= 50 + .9Y.1Y = 50

Y = $500 is the equilibrium level of income.

What is the value of saving at equilibrium?

Savings = income - consumption at the equilibrium level of Y=500,

Consumption = 30 +.9 * 500 = $480

Savings = 500 - 480= 20

c. Does the saving and Investment Identity hold true at equilibrium income OR GDP?

Since planned investment = $20 which is equal to savings calculated, the saving investment identity holds true at equilibrium income.

2. In addition to the values given in question (1) above, assume the government increases its spending by $30 without raising taxes. The government can do this by borrowing from the private sector.

a. Based on this information calculate the new level of equilibrium income.

If Government expenditures = $30, Y = C + I + G

Y = 1/1-.09 * (30+20+30) Y = 800

b. Calculate the total value of consumption at equilibrium.

C = 30 + .9(800) = 750

c. Calculate the total value of saving at equilibrium.

Savings = I - C = 800 - 750 = 50

3. In addition to questions in (1 & 2) above, assume the government decides to raise autonomous taxes by $30 to balance its budget.

What is the new value of equilibrium income?

Y = 1/1-.9 (30-.9(30) +20+30) = 530

What is the value of the autonomous tax multiplier?

-.09/.01 = -9

c. What is the value of autonomous spending multiplier?

1/.1 = 10