week 18 Flashcards
what is saving
current income - current needs
what is the saving rate
saving / income
what is wealth
value of assets - liabilities
what is flow value
dynamic movement of goods, services or money over time and measured as a rate
eg spending and wages
what is a stock value
defined at a specific point in time and is static
eg wealth, debt and investment
what are capital gains
increase the value of existing assets
higher value of stock
higher housing value
selling price > purchase price
what are capital losses
decreases value of existing assets
selling an asset lower than purchase price
how do you calculate change in wealth
saving + capital gains - capital losses
what are the types of household saving
life-cycle saving
precautionary saving
bequest saving
wealth accumulation
consumption smoothing
what is life-cycle saving
meet long term objectives eg retirement, house buying, university
what is precautionary saving
protection against setbacks and income fluctuations eg job loss
what is bequest saving
leave an inheritance, mainly higher income groups
what is wealth accumulation
used to purchase assets such as a home or business, generate income or appreciate in value overtime
what is consumption smoothing
save to smooth out consumption over their lifetime, save during periods of high income and consume in periods of low income
what is real interest rate
nominal interest rate - rate of inflation
what can decrease savings rate
mortgages
confidence in prosperous future
increasing stocks value
low interest rates
how do you calculate national savings
assume NX = 0
S = Y - C - G
national savings = current income - spending on current needs
Sprivate + Spublic = (Y-T-C) + (T-G)
what is private saving
household + business saving
S = Y - T - C
what is business savings
revenues - operating costs - dividends to shareholders
what is public saving
amount of the public sectors income that is not spent on current needs
S = T - G
what is a balanced budget
occurs when gov spending = net tax receipts
what is a gov budget surplus
excess of gov net tax collections over spending
T-G
what is a gov budget deficit
excess of gov spending over net tax collections
G-T
what is investment
creation of new capital goods and housing
necessary to increase average labour productivity
what is the investment decision
two important costs - price of capital goods and real interest rates
VMP is the benefit
what is rate of return
value of marginal product as a percentage of purchase price
VMP/PK
if VMP/PK > r, then investment is profitable
what are financial intermediaries
firms that extend credit to borrowers using funds raised from savers
what are banking systems
help savers by evaluating quality of potential borrowers, direct savings towards higher return options
what are bonds
a legal promise to pay someone a debt, usually including both the principle amount and regular interest payments
what is the principal amount
amount originally lent
what is a coupon rate
interest rate promised when the bond is issued
what are coupon payments
regular interest payments made to the bondholder
how do bond markets ensure savings are most productive
gather info about prospective borrowers
help savers to share risks of lending
companies considering a new issue of shares of bonds know recent performance and plans for future will be carefully studied by financial investors
what is diversification
spreading ones wealth over a variety of investments to reduce risk
what is supply of savings
amount of savings that would occur at each possible real interest rate
what is demand for investment
amount of savings borrowed at each possible real interest rate
how do financial markets adjust to technological improvement
raises marginal productivity of capital
increases demand for investment
how do government budget increases affect financial markets
gov budget deficit increases
reduces national savings
higher interest rate
private investment is crowded out
how do you increase national saving
policymakers know the benefits of increased national saving rates
reducing budget deficit would increase national saving
increase incentives for households
higher national saving rate leads to greater investment in new capital goods and a higher standard of living
what is austerity
fiscal policy approach that involves reducing gov spending and/or increasing taxes in order to reduce budget deficits and debt
what is stimulus
fiscal and monetary policy to elicit an economic response from the private sector
