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Chapter 8

Chapter 8 - Saving, Investment & Financial System

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ECN 204
Eric Kam

Wednesday February 15 , 2012 Chapter 8 Saving, Investment, and the Financial System Financial Institutions: -The financial system: the group of institutions that helps matches the saving of one person with the investment of another -Financial markets: institutions through which savers can directly provide funds to borrowers -Examples:  The Bond Market  A bond is a certificate of indebtedness  The Stock Market  A stock is a claim to partial ownership in a firm -Financial intermediaries: institutions through which savers can indirectly provide funds to borrowers  Examples: 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: -Recall that GDP is both total income in an economy and total expenditure on the economy’s output of goods and services:  Y = C + I + G + NX  In a closed economy:  Y = C + I + G Different Kinds of Saving: -Private saving  =The portion of households’ income that is not used for consumption or paying taxes  =Y – T – C  measure of income is “disposable income,” or gross income minus taxes (“take-home pay”)  the measure of expenditure is consumption -Public saving  =Tax revenue less government spending  =T – G  the measure of income is T, total taxes, which is the government’s source of “income”  the measure of expenditure is simply G, government purchases 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 government purchases Saving and Investment: -national income accounting identity:  Y = C + I + G + NX -For the rest of this chapter, focus on the closed economy case: Wednesday February 15 , 2012  Y = C + I + G Budget Deficits and Surpluses: -Budget Surplus  = an excess of tax revenue over government spending  = T – G  = public saving Budget Deficit:  a shortfall of tax revenue from government spending  = G – T  = – (public saving) The Meaning of Saving and Investment: -Private saving: is the income remaining after households pay their taxes and pay for consumption -Examples of what households do with saving:  Buy corporate bonds or equities  Purchase a certificate of deposit at the bank  Buy shares of a mutual fund  Let accumulate in saving or checking accounts The Meaning of Saving and Investment: -Investment: is the purchase of new capital -Examples:  Research in Motion spends $250 million to build a new R&D centre in Waterloo, Ontario  You buy $5000 worth of computer equipment for your business  Your parents spend $300,000 to have a new house built -In economics, investment is NOT the purchase of stocks and bonds! The Market for Loan-able Funds: -A supply-demand model of the financi
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