Textbook Notes (270,000)
CA (160,000)
UTM (8,000)
ECO (400)
ECO100Y5 (200)
Chapter 10

ECO100Y5 Chapter Notes - Chapter 10: Loanable Funds, Nominal Interest Rate, Government Budget Balance


Department
Economics
Course Code
ECO100Y5
Professor
Michael H O
Chapter
10

This preview shows pages 1-3. to view the full 11 pages of the document.
Chapter 10 – Savings, Investment spending, and the financial system
Savings-Investment spending identity – Theory that savings and investment
spending are always equal for the economy as a whole.
GDP = C + I + G + X – IM
C = Consumer spending
I = Investment spending
G = Government spending on goods and services
X = Value of exports
IM = Spending on imports
Savings-Investment spending identity in a closed economy
National Savings (Snational) – total amount of domestic savings generated within an
economy
Public Savings (aka budget balance) – difference between net tax revenue (T-TR)
and government spending on final goods and services (i.e.: T-TR-G). If the budget
balance is positive, then the government is running a budget surplus. If it is negative,
than government is running a budget deficit. If it is 0, government is running a
balanced budget.
Because a closed economy has no imports (IM) or exports (X) we eliminate those.
GDP = C + I + G
SPrivate (Savings by households) = GDP + TR T C
SPublic (Savings by Government) = T TR G
SNational (Both household + government savings)
SNational = SPrivate + SPublic = (GDP + TR T C) + (T TR G)
SNational = GDP C G
Or
Snational = I
Where…
TR = transfers from the government
T = Taxes
Hence, I = SNational.
Investment spending = National savings in a closed economy.
find more resources at oneclass.com
find more resources at oneclass.com

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

Savings-Investment Spending identity in an open economy
Net Foreign Investment (NFI) – The total outflows of funds out of a country minus the
total inflows of funds into that country. Becomes negative when foreigners invest more
money in a country than a country invests in other countries.
Net foreign investment (NFI) equal net exports in an open economy
NFI = Exports – Imports = Net exports
So, rearranging the earlier equation we get
(GDP – C – G) = I + (X-IM)
Which becomes
SNationaI = I + NFI
National Savings = Investment spending + Net Foreign Investment
In 2007, Canada national savings exceeded domestic investment, so the excess money
was investment abroad. In 2010, the opposite, National savings was less than
investment spending, so the opposite occurred.
Domestic Market for Loanable Funds
Loanable funds market – Hypothetical market that shows the market outcome of the
demand for funds generated by borrowers and supply of funds provided by lenders.
The interest rate is the price, calculated as a percentage of the amount borrowed,
charged by the lender to a borrower for the use of their savings for one year.
Present value of Y dollars is the amount of money you would need to invest today at
the given interest rate to receive Y dollars in the future.
find more resources at oneclass.com
find more resources at oneclass.com

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

Domestic demand for loanable funds
- Comes from those who need to borrow funds to finance their domestic
investment projects.
Demand curve for loanable funds slopes downwards, the lower the interest rate the
higher to quantity (dollars) of loanable funds demanded. In this example, when the
interest rate goes from 12% to 4%, the quantity demanded goes from 15 to 45 billion.
Domestic Supply of Loanable Funds
The supply curve slops upwards; the higher the interest rate the greater quantity of
loanable funds supplied.
find more resources at oneclass.com
find more resources at oneclass.com
You're Reading a Preview

Unlock to view full version