2.3: Savings and Wealth (2.3, 5.1-5.2)

Question 1

wealth =

Answer 1

wealth = assets - liabilities

Question 2

saving

Answer 2

unit’s current income - spending on current needs

1. private
2. govt
3. ntl

Question 3

private saving & private saving rate

Answer 3

private disposable income - consumption

Spvt = (Y + NFP - T + TR + INT) - C

private saving rate = private saving/ private disp income

Question 4

govt saving / govt budget surplus

Answer 4

government receipts - govt outlays

Sgovt = (T - TR - INT) - G

Question 5

national saving

Answer 5

private saving + govt saving
also, GNP (Y + NFP) - consumption and govt purchases

S = Spvt + Sgovt
= Y + NFP - C - G

Question 6

govt receipts

Answer 6

= tax revenue T

Question 7

govt outlays

Answer 7

sum of govt purchases of G&S (G), transfers (TR) and interest payments on govt debt (INT) (this is the same as govt savings)

Question 8

govt budget deficit

Answer 8

difference b/w outlays and receipts

Question 9

national saving

Answer 9

national saving = private + govt saving

S = Spvt + Sgovt
S = (Y + NFP - T + TR + INT - C) + (T - TR - INT - G)
S = Y + NFP - C - G

Question 10

what is private saving used for?

Answer 10

to fund new capital investment, provide resource govt needs to finance its budget deficits, and acquire assets from or lend to foreigners

Question 11

expression for national saving

Answer 11

S = (C + I + G + NX) + NFP - C - G.

Simplified –>
S = I + (NX + NFP)
CA = NX + NFP

Simplified again –>
S = I + CA

Question 12

current account balance

Answer 12

= 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

Question 13

uses-of-savings identity

Answer 13

Spvt= I + (-Sgovt) + CA

(-Sgovt = govt budget deficit)

1. Investment. I. Firms borrow from private savers to finance the construction and purchase of new capital (including residential capital) and inventory investment
2. Govt budget deficit. When govt runs a budget deficit, it must borrow from private savers to cover the difference b/w outlays and receipts
3. 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.

Question 14

flow variables

Answer 14

variables measured per unit of time

Question 15

stock variables

Answer 15

variables that are defined at a point in time

Question 16

wealth - stock or flow variable?

Answer 16

wealth is measured in dollars at a point in time and is a stock variable

Question 17

savings - stock or flow variable?

Answer 17

savings is measured in dollars per unit time and is a flow variable

Question 18

national wealth

Answer 18

(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

Question 19

net foreign assets

Answer 19

= the country’s foreign assets (foreign stocks, bonds, and factories owned by domestic residents) - its foreign liabilities (domestic and physical assets owned by foreigners)

Question 20

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 __________.

Answer 20

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.

Question 21

current account

Answer 21

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

Question 22

net income from abroad

Answer 22

= income receipts from abroad - income payments to residents of other countries (almost equal to NFP)

Question 23

unilateral transfers

Answer 23

payments from one country to another that do not correspond to the purchase of any good, service, or asset. foreign aid, remittances

Question 24

current account balance

Answer 24

adding all credit items and subtracting all debit items in the current account.

Question 25

capital account

Answer 25

unilateral transfers of assets b/w countries (debt forgiveness and migrants’ transfers)

Question 26

financial account & financial in/outflows

Answer 26

(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

Question 27

official reserve assets

Answer 27

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