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26. Saving, Investment, and the Financial System. E conomics. P R I N C I P L E S O F. N. Gregory Mankiw. Premium PowerPoint Slides by Ron Cronovich. In this chapter, look for the answers to these questions:.

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Saving investment and the financial system

26

Saving, Investment, and the Financial System

Economics

P R I N C I P L E S O F

N. Gregory Mankiw

Premium PowerPoint Slides by Ron Cronovich


In this chapter look for the answers to these questions

In this chapter, look for the answers to these questions:

  • What are the main types of financial institutions in the U.S. economy, and what is their function? 대표적인 금융기관의 유형과 그 기능

  • What are the three kinds of saving? 저축의 세가지 종류

  • What’s the difference between saving and investment?저축과 투자의 차이

  • How does the financial system coordinate saving and investment? 금융제도는 어떻게 저축과 투자를 조정하는가?

  • How do govt policies affect saving, investment, and the interest rate? 정부 정책은 어떻게 저축, 투자 및 이자율에 영향을 미치는가?

1


Financial institutions

Financial Institutions 금융기관들

The financial system: the group of institutions that helps match the saving of one person with the investment of another. 금융제도란 한 사람의 저축을 다른 사람의 투자로 연결하는 것을 돕는 기관들의 그룹이다.

Financial markets: institutions through which savers can directly provide funds to borrowers. 저축하는 사람들이 차입하는 사람들에게 직접 자금을 제공할 수 있게 해주는 제도

Examples:

The Bond Market. A bond is a certificate of indebtedness.(차용증서)

The Stock Market. A stock is a claim to partial ownership in a firm. (한 회사의 소유 지분에 대한 청구권)

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


Financial institutions1

Financial Institutions

Financial intermediaries: institutions through which savers can indirectly provide funds to borrowers. 금융중개기관은 저축하려는 사람들이 차입하려는 사람들에게 자금을 간접적으로 공급할 수 있게 해주는 기관

Examples:

Banks

Mutual funds – institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds일반대중에게 주식을 공모하여 조성한 자금으로 다양한 주식과 채권을 구입하는 투자회사

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


Different kinds of saving

Different Kinds of Saving

Private saving 민간저축

=The portion of households’ income that is not used for consumption or paying taxes

=Y – T – C

Public saving 정부저축

=Tax revenue less government spending

= T – G

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


National saving

National Saving

National saving 국민저축

=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, INVESTMENT, AND THE FINANCIAL SYSTEM


Saving and investment

Saving and Investment

Recall the national income accounting identity:

Y = C + I + G + NX

For the rest of this chapter, focus on the closed economy case:

Y = C + I + G

Solve for I:

national saving

= (Y – T – C) + (T – G)

I = Y – C – G

Saving = investment in a closed economy

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


Budget deficits and surpluses

Budget Deficits and Surpluses

Budget surplus 재정흑자

= an excess of tax revenue over govt spending

= T – G

= public saving

Budget deficit 재정적자

= a shortfall of tax revenue from govt spending

= G – T

= – (public saving)

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


A c t i v e l e a r n i n g 1 a calculations

A C T I V E L E A R N I N G 1A. Calculations

  • Suppose GDP equals $10 trillion, consumption equals $6.5 trillion, the government spends $2 trillion and has a budget deficit of $300 billion.

  • Find public saving, taxes, private saving, national saving, and investment.

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A c t i v e l e a r n i n g 1 answers part a

A C T I V E L E A R N I N G 1Answers, part A

Given: Y = 10.0, C = 6.5, G = 2.0, G – T = 0.3

Public saving = T – G = – 0.3

Taxes: T = G – 0.3 = 1.7

Private saving = Y – T – C= 10 – 1.7 – 6.5 = 1.8

National saving = Y – C – G = 10 – 6.5 = 2 = 1.5

Investment = national saving = 1.5

9


A c t i v e l e a r n i n g 1 b how a tax cut affects saving

A C T I V E L E A R N I N G 1B. How a tax cut affects saving

  • Use the numbers from the preceding exercise, but suppose now that the government cuts taxes by $200 billion. (정부가 세금을 2000억 삭감했다면)

  • In each of the following two scenarios, determine what happens to public saving, private saving, national saving, and investment.

    1.Consumers save the full proceeds of the tax cut.

    2.Consumers save 1/4 of the tax cut and spend the other 3/4.

10


A c t i v e l e a r n i n g 1 answers part b

A C T I V E L E A R N I N G 1Answers, part B

In both scenarios, public saving falls by $200 billion, and the budget deficit rises from $300 billion to $500 billion.

1.If consumers save the full $200 billion, national saving is unchanged, so investment is unchanged.

2.If consumers save $50 billion and spend $150 billion, then national saving and investment each fall by $150 billion.

11


A c t i v e l e a r n i n g 1 c discussion questions

A C T I V E L E A R N I N G 1C. Discussion questions

The two scenarios from this exercise were:

1.Consumers save the full proceeds of the tax cut.

2.Consumers save 1/4 of the tax cut and spend the other 3/4.

  • Which of these two scenarios do you think is more realistic?

  • Why is this question important?

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The meaning of saving and investment

The Meaning of Saving and Investment

Private saving is the income remaining after households pay their taxes and pay for consumption. 민간저축은 가계가 세금과 소비를 위한 지출을 하고 난 후 남은 소득이다.

Examples of what households do with saving: 가계가 저축으로 하는 일의 예

Buy corporate bonds or equities 기업의 채권이나 주식구입

Purchase a certificate of deposit at the bank 은행에서 양도성 예금증서 구입

Buy shares of a mutual fund 뮤츄얼펀드 주식구입

Let accumulate in saving or checking accounts 저축 또는 당좌예금 적립

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


The meaning of saving and investment1

The Meaning of Saving and Investment

Investment is the purchase of new capital. 투자는 새로운 자본의 구입을 의미한다.

Examples of investment:

General Motors spends $250 million to build a new factory in Flint, Michigan. GM이 새 공장을 건설

You buy $5000 worth of computer equipment for your business. 사업을 위해서 5000달러짜리 컴퓨터 구입

Your parents spend $300,000 to have a new house built. 새집을 짓는데 3십만 달러 사용

Remember: In economics, investment is NOT the purchase of stocks and bonds!

경제학에서 투자는 주식과 채권의 구입이 아니다.

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


The market for loanable funds

The Market for Loanable Funds 대부자금 시장

A supply-demand model of the financial system 금융제도의 수요공급 모델

Helps us understand 다음을 이해할 수 있게 함

how the financial system coordinates saving & investment 금융제도가 어떻게 저축과 투자를 조정하는지

how govt policies and other factors affect saving, investment, the interest rate 정부 정책이나 다른 요인들이 저축, 투자, 이자율에 어떤 영향을 미치는지

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


The market for loanable funds1

The Market for Loanable Funds

Assume: only one financial market 하나의 금융시장만 있다고 가정

All savers deposit their saving in this market. 모든 저축자는 이 시장에서 저축을 예금함

All borrowers take out loans from this market. 모든 차입자는 이 시장에서 대부를 얻음

There is one interest rate, which is both the return to saving and the cost of borrowing. 이자율은 하나만 존재(저축이자율=차입이자율)

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


The market for loanable funds2

The Market for Loanable Funds

The supply of loanable funds comes from saving: 대부자금의 공급은 저축에서 나온다.

Households with extra income can loan it out and earn interest. 여분의 소득을 가진 가계는 그것을 빌려주고 이자를 벌 수 있다.

Public saving, if positive, adds to national saving and the supply of loanable funds. 정부저축이 (+)라면 국민저축과 대부자금의 공급에 보탬이 된다.

If negative, it reduces national saving and the supply of loanable funds. 만약 (-)라면 국민저축과 대부자금의 공급이 줄어든다.

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


The slope of the supply curve

The Slope of the Supply Curve

InterestRate

Supply

6%

3%

80

60

Loanable Funds ($billions)

An increase in the interest rate makes saving more attractive, which increases the quantity of loanable funds supplied. 이자율의 상승은 저축을 더욱 매력적이게 만들어 대부자금의 공급량을 증가시킨다.

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


The market for loanable funds3

The Market for Loanable Funds

The demand for loanable funds comes from investment: 대부자금에 대한 수요는 투자에서 나온다.

  • Firms borrow the funds they need to pay for new equipment, factories, etc. 기업은 새로운 장비나 공장 등에 지출할 자금을 빌린다.

  • Households borrow the funds they need to purchase new houses. 가계도 새 집을 사는데 필요한 자금을 빌리나.

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


The slope of the demand curve

The Slope of the Demand Curve

InterestRate

7%

4%

Demand

50

80

Loanable Funds ($billions)

A fall in the interest rate reduces the cost of borrowing, which increases the quantity of loanable funds demanded. 이자율의 하락은 차입비용을 줄여 대부자금의 수요량을 증대시킨다.

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


Equilibrium

Equilibrium

InterestRate

Supply

5%

Demand

60

Loanable Funds ($billions)

The interest rate adjusts to equate supply and demand.이자율은 공급과 수요가 같아지도록 조정한다.

The eq’m quantity of L.F. equals eq’m investment and eq’m saving. 대부자금의 균형거래량은 균형투자량 및 균형 저축량과 일치한다.

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


Policy 1 saving incentives

Policy 1: Saving Incentives

S2

4%

70

Tax incentives for saving increase the supply of L.F. 저축에 대한 세금 혜택은 대부자금의 공급을 증대시킴

InterestRate

S1

…which reduces the eq’m interest rate 이는 균형이자율을 떨어뜨리고

5%

and increases the eq’m quantity of L.F. 균형거래량을 증가시킴

D1

60

Loanable Funds ($billions)

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


Policy 2 investment incentives

Policy 2: Investment Incentives

6%

D2

70

An investment tax credit increases the demand for L.F. 투자세액공제는 대부자금에 대한 수요를 증대시킨다.

InterestRate

S1

…which raises the eq’m interest rate 이는 이자율을 상승시키고

5%

and increases the eq’m quantity of L.F. 균형거래량을 증가시킨다.

D1

60

Loanable Funds ($billions)

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


A c t i v e l e a r n i n g 2 exercise

A C T I V E L E A R N I N G 2Exercise

Use the loanable funds model to analyze the effects of a government budget deficit:

  • Draw the diagram showing the initial equilibrium.

  • Determine which curve shifts when the government runs a budget deficit.

  • Draw the new curve on your diagram.

  • What happens to the equilibrium values of the interest rate and investment?

24


A c t i v e l e a r n i n g 2 answers

S2

6%

50

A C T I V E L E A R N I N G 2Answers

A budget deficit reduces national saving and the supply of L.F.

InterestRate

S1

…which increases the eq’m interest rate

5%

and decreases the eq’m quantity of L.F. and investment.

D1

60

Loanable Funds ($billions)

25


Budget deficits crowding out and long run growth

Budget Deficits, Crowding Out, and Long-Run Growth 재정적자, 구축효과 그리고 장기 성장

Our analysis: Increase in budget deficit causes fall in investment. 재정적자의 증가는 투자를 감소시킨다.

The govt borrows to finance its deficit, leaving less funds available for investment. 정부가 적자를 보충하기 위해 차입을 하면 투자를 위한 자금이 줄어들기 때문이다.

This is called crowding out. 이를 구축효과라고 한다.

Recall from the preceding chapter: Investment is important for long-run economic growth. Hence, budget deficits reduce the economy’s growth rate and future standard of living.

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


The u s government debt

The U.S. Government Debt

The government finances deficits by borrowing (selling government bonds).

Persistent deficits lead to a rising govt debt.

The ratio of govt debt to GDP is a useful measure of the government’s indebtedness relative to its ability to raise tax revenue.

Historically, the debt-GDP ratio usually rises during wartime and falls during peacetime – until the early 1980s.

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


U s government debt as a percentage of gdp 1970 2007

WW2

Revolutionary War

Civil War

WW1

U.S. Government Debt as a Percentage of GDP, 1970-2007

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Conclusion

CONCLUSION

  • Like many other markets, financial markets are governed by the forces of supply and demand.

  • One of the Ten Principles from Chapter 1: Markets are usually a good way to organize economic activity.

    Financial markets help allocate the economy’s scarce resources to their most efficient uses.

  • Financial markets also link the present to the future: They enable savers to convert current income into future purchasing power, and borrowers to acquire capital to produce goods and services in the future.

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM


Chapter summary

CHAPTER SUMMARY

  • The U.S. financial system is made up of many types of financial institutions, like the stock and bond markets, banks, and mutual funds.

  • National saving equals private saving plus public saving.

  • In a closed economy, national saving equals investment. The financial system makes this happen.

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Chapter summary1

CHAPTER SUMMARY

  • The supply of loanable funds comes from saving. The demand for funds comes from investment. The interest rate adjusts to balance supply and demand in the loanable funds market.

  • A government budget deficit is negative public saving, so it reduces national saving, the supply of funds available to finance investment.

  • When a budget deficit crowds out investment, it reduces the growth of productivity and GDP.

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