ECON 201 Chapter 10: Savings & Investment Spending, Loanable Funds, Financial System

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6 Feb 2017
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Econ 201 Chapter 10 Savings and Investment Spending
Savings & Investment Spending Identity
Savings = Investment Spending
How we derive this:
o Income (Y) = Consumption (C) + Savings (S)
o Y = C + S
o S = Y C
o Let’s look at ou atioal aoutig idetit but simplified (assume no G or NX)
o Y = C + I
o I = Y C
o Equate these two equations and we get S = I
This means that the amount saved is equal to the amount used in investment spending
o Let’s sa ou sae oe ad put it ito a ak. That oe is goig to e lent out and
used for investment spending.
Let’s add goeet ak ito the euatio:
o Y = C + I + G
o The government can tax and borrow.
o Taxes reduce income.
o For a household, now:
Disposable income = Y T
Private savings = Y T C
o The government buys G with T (tax revenue)
Public savings = T G
Thus, a deficit is when the government spends more than it makes in tax
revenue (negative). It must borrow money.
A surplus is when it spends less than it makes in tax revenue (profit). It can lend
money.
Let’s look at national savings.
o Y = C + I + G
o Y C T = I
o Y T C + T G = I just add and subtract T
o (Y T C) + (T G) = I
o Private savings + public savings = investment spending
o National savings = private savings + public savings
Let’s add the rest of the world back in.
o Y = C + I + G + NX
o Private savings + public savings = I + NX
o National savings = I + NX
If NX < 0, national savings < I. This means that foreign savings are financing our
investment spending.
If NX > 0, national savings > I. This means that our savings are going elsewhere
to finance investment spending there.
o NX = - NCI
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