Ch 21 Flashcards
(29 cards)
Saving
current income minus spending on current needs
The saving rate is saving divided by income
Wealth
is the value of assets minus liabilities
Assets are anything of value that one owns
Liabilities are the debts one owes
The balance sheet is a list of an economic unit’s assets and liabilities
Specific date
Economic unit (business, household, etc.)
A flow value
is defined per unit of time
Income ■ Spending
Saving ■ Wage
A stock value
defined at a point in time
Wealth ■ Debt
Capital gains
increase the value of existing assets
Higher value for stock
Capital losses
decreases the value of existing assets
Car accident damages bumper and front headlight
Change in wealth =
Saving + Capital gains – Capital losses
Three Reasons for Household Saving
- Life-cycle saving is to meet long-term objectives
Retirement ■ Purchase a home
Children’s college attendance - Precautionary saving is for protection against setbacks
Loss of job ■ Medical emergency - Bequest saving is to leave an inheritance
Mainly higher income groups
Important part of overall saving
Savings often take the form of financial assets that pay a return
Bonds
Mutual funds
Stocks
The real interest rate (r)
(r) is the nominal interest rate (i) minus the rate of inflation ()
The increase in purchasing power from a financial asset
Marginal benefit of the extra saving
Two otherwise identical families have different savings rates
Higher savings reduces current consumption
Thrifts consume $32,000 in 1985 and Spends consume $38,000
Thrifts gets more rapid
increase in wealth
Thrift’s income grows faster
From 2000 on, Thriftsconsume more than Spends
Savings rate may be depressed by
Social Security, Medicare, and other government programs for the elderly
Mortgages with small or no down payment
Confidence in a prosperous future
Increasing value of stocks and growing home values
Readily available home equity loans
Demonstration effects and status goods (imitation of high consumption by others
Macroeconomics studies total savings in the economy
Household savings is one component
Business and government savings are other parts
Start with the definition of production and income for the economy
Y = C + I + G + NX
Y = aggregate income
C = consumption expenditure G = government purchases of goods and services I = investment spending NX = net exports
Calculate National Savings
Assume NX = 0 for simplicity
National savings (S) is current income less spending on current needs
Current income is GDP or Y
Spending on current needs
Exclude all investment spending (I)
Most consumption and government spending is for current needs
For simplicity, we assume all of C and all of G are for current needs
S = Y – C – G
Private saving
household plus business saving
Household’s total income is Y
Households pay taxes (T) from this income
T = Taxes – Transfers – Government interest payments
is after-tax income less consumption
S PRIVATE = Y – T – C
Public saving
is the amount of the public sector’s income that is not spend on current needs
Public sector income is net taxes
Public sector spending on current needs is G
SPUBLIC = T – G
S PRIVATE + S PUBLIC = (Y – T – C) + (T – G)
S = Y – C – G
Balanced budget
occurs when government spending equals net tax receipts
Government budget surplus
is the excess of government net tax collections over spending (T – G)
Budget surplus is public savings
Pay debt to the public
Government budget deficit
is the excess of government spending over net tax collections
Budget deficit is public dissavings
Borrow from the public by issuing G bonds
Three reasons for change in government budget
Government receipts decreased during the recessions of 2001 and 2007-2009
Lower income during recession means lower taxes
Government spending increased
Wars in Iraq (2003) and Afghanistan (2001)
Two important costs
Price of the capital goods
Real interest rates
Real cost to the firm of paying back its debt
Measures the opportunity cost of a capital investment
