2.3: Savings and Wealth (2.3, 5.1-5.2) Flashcards
wealth =
wealth = assets - liabilities
saving
unit’s current income - spending on current needs
- private
- govt
- ntl
private saving & private saving rate
private disposable income - consumption
Spvt = (Y + NFP - T + TR + INT) - C
private saving rate = private saving/ private disp income
govt saving / govt budget surplus
government receipts - govt outlays
Sgovt = (T - TR - INT) - G
national saving
private saving + govt saving
also, GNP (Y + NFP) - consumption and govt purchases
S = Spvt + Sgovt
= Y + NFP - C - G
govt receipts
= tax revenue T
govt outlays
sum of govt purchases of G&S (G), transfers (TR) and interest payments on govt debt (INT) (this is the same as govt savings)
govt budget deficit
difference b/w outlays and receipts
national saving
national saving = private + govt saving
S = Spvt + Sgovt S = (Y + NFP - T + TR + INT - C) + (T - TR - INT - G) S = Y + NFP - C - G
what is private saving used for?
to fund new capital investment, provide resource govt needs to finance its budget deficits, and acquire assets from or lend to foreigners
expression for national saving
S = (C + I + G + NX) + NFP - C - G.
Simplified –>
S = I + (NX + NFP)
CA = NX + NFP
Simplified again –>
S = I + CA
current account balance
= payments received from abroad in exchange for currently produced goods and services (including factor services) - analogous payments made to foreigners by domestic economy
CA = NX + NFP
uses-of-savings identity
Spvt= I + (-Sgovt) + CA
(-Sgovt = govt budget deficit)
- Investment. I. Firms borrow from private savers to finance the construction and purchase of new capital (including residential capital) and inventory investment
- Govt budget deficit. When govt runs a budget deficit, it must borrow from private savers to cover the difference b/w outlays and receipts
- Current account balance. When US current account balance is +, foreigners’ receipt of payments from the US are not sufficient to cover the payments they make to the US. They make up the difference by borrowing from US private savers or sell to US savers some of their assets
When US current account balance is negative, (80-2000s), US receipts of payments from foreigners are not sufficient to cover US payments to foreigners. US must borrow from foreigners or sell US assets to them. Foreigners use their saving to lend to the US or to acquire US assets.
flow variables
variables measured per unit of time
stock variables
variables that are defined at a point in time
wealth - stock or flow variable?
wealth is measured in dollars at a point in time and is a stock variable
savings - stock or flow variable?
savings is measured in dollars per unit time and is a flow variable
national wealth
(1) country’s physical assets (stock of capital goods and land)
(2) net foreign assets
can change over time in two ways:
(1) value of the existing physical assets/liabilities may change
(2) depreciation of physical assets reduces ntl wealth
net foreign assets
= the country’s foreign assets (foreign stocks, bonds, and factories owned by domestic residents) - its foreign liabilities (domestic and physical assets owned by foreigners)
when a country’s desired national saving exceeds its desired investment, the country will be a _________ in the international capital market and will have a __________.
when a country’s desired national saving exceeds its desired investment, the country will be a lender in the international capital market and will have a current account surplus.
current account
measures a country’s trade in unilateral transfers b/w countries. (1) net exports of G&S (2) net income from abroad (3) net unilateral transfers
net income from abroad
= income receipts from abroad - income payments to residents of other countries (almost equal to NFP)
unilateral transfers
payments from one country to another that do not correspond to the purchase of any good, service, or asset. foreign aid, remittances
current account balance
adding all credit items and subtracting all debit items in the current account.
capital account
unilateral transfers of assets b/w countries (debt forgiveness and migrants’ transfers)
financial account & financial in/outflows
(called capital account before 1999)
financial inflow - when the home country sells an asset to another country
financial outflow - when the home country buys an asset from abroad
official reserve assets
assets, other than domestic money or securities, that can be used to make international payments. was gold, now also govt securities of major industrialized economies, foreign bank deposits, special assets created by IMF
