Lecture 6.1: Savings + Capital Formation Flashcards
Saving definition
Current disposable income (Y-T) less spending on current needs (C)
Saving rate formula
Saving/Income
3 key motives for saving
- Lifecycle savings - savings against predictable events e.g. retirement or dissaving (borrowing).
- Precautionary savings - savings agains unpredictable events.
- Bequests - savings for the next generation.
National savings formula
= private savings + public savings
= S + T - G
= I (investment)
What are flow variables?
w. example
Variables measured per unit of time e.g. your wage per fortnight
What are stock variables?
w. examples
Variables measured at a point in time e.g. the value of your assets, liabilities and net wealth (assets-liabilities)
Flow(t) formula
= Stock(t+1)-Stock(t)
Stock(t) formula
= Flow(t-1)+Flow(t-2)+…+Stock(0)
What is denoted by K(t)?
Net capital accumulation formula
Physical capital
What is denoted by I(t)?
Net capital accumulation formula
Investment
What is denoted by delta?
Net capital accumulation formula
Depreciation
Net capital accumulation formula
K(t+1)-K(t) = I(t) - deltaK(t)
Explain the savings and investment model
axis, demand and supply curve titles
Y-axis = real interest rate
X-axis = quantity of saving/investment
Supply curve = savings
Demand curve = investment
ie. schedules of the amount of savings/investment at a certain real interest rate level
Is K in this context physical or financial capital?
Physical e.g. PPE etc.
Labour share of income formula
= (w x L)/Y
= (MPL x L)/Y
sub in the cobb-douglas function and cancel for this to then be useful…youll get it equals 1-alpha
