Chapter 10 Flashcards
Savings-Investment Spending Identity
Savings and Investment spendings are always equal
who pays for private investment spendings?
individuals create capital with other people’s money and savings
Investment Spending in a closed economy (2)
no imports or exports (no trade)
savings=investment spendings
why does income of economy=spending in a closed economy?
one person’s spendings is another person’s income
Total Income Equation
GDP=C+G+S
Total Spendings Equation
GDP=C+G+I
Budget Surplus
Tax Revenue > Government Spendings= high savings
Budget Deficit
Tax Revenue < Government Spendings= low savings
Budget Balance
Difference between tax revenue and government spending, positive=surplus, negative=deficit
National Savings
Sum of private savings(household) (GDP-T+TR-C) and public savings(government)
Investment Spending Identity in open economy (2)
- open to trade so money flows in and out
- savings of people in one country can be used to finance investment spendings in another
3 types of capital and description
physical - manufactured aids ex machine
human - education and skills and knowledge of labour force ex university
financial - funds from savings used for investments ex stocks
Inflow of Funds (capital inflows)
Foreign savings that finance domestic investment
outflow of funds (capital outflows)
domestic savings that finance foreign investment
Net Foreign Investment
total outflow of funds - total inflow of funds
NFI<0 (2)
- foreigners invest more on country then country invest more on other countries
- country borrows funds
In a open economy savings=
investments plus net foreign investments
Financial Markets
Channel savings of households as investments to businesses that want to borrow money so they can invest