Chapter 4 Saving, Investment and Financial System

LECTURE VIDEO学习视频2:

LEARNING OUTLINE学习大纲:

 Saving and Investment in the National Income Accounts

Recall that GDP: Y=C+I+G+NX

In a closed economy: NX=0; hence, Y=C+I+G

To isolate investment, we can subtract C and G from both sides: Y-C-G=I

The left-hand side of this equation (Y – C – G ) is the total income in the economy after paying for consumption and government purchases. This amount is called national saving (saving), denoted "S". S=Y-C-G

Substituting national saving (S) into our identity gives us: S=I.

This equation tells us that saving equals investment.

national saving: S = Y – C – G

We can add taxes (T) and subtract taxes (T): S = (Y – T – C) + (T – G)

(Y – T – C ): called private saving, is the income that households have left after paying for taxes and consumption. In particular, households earn income of Y, pay taxes of T, and spend C on consumption. 

 (T – G ): called public saving, is the tax revenue that the government has left after paying for its spending.  In particular, the government receives T in tax revenue and spends G on goods and services. 

If the government receives more taxes than it spends, then T is larger than G, and the public saving is positive. Therefore, we say the government runs a budget surplus.

While, if the gvt spends more than it receives in tax revenues, then G is larger than T, and the public saving is negative. In this case, the government runs a budget deficit.

The fact that "S = I" means that (for the economy as a whole) saving must be equal to investment.

The bond market, the stock market, banks, mutual funds, and other financial markets and institutions stand between the two sides of the S = I equation.

These markets and institutions take in the nation's saving and direct it to the nation's investment.

PRACTICE 习题2：

【课外完成】Continued the previous practice:

在上面习题的基础上，思考：

Suppose now that the government cuts taxes by $5,000. 

In each of the following two scenarios, determine what happens to public saving, private saving, national saving, and investment. 

(1) Consumers save the full proceeds of the tax cut.  

(2) Consumers save 1/4 of the tax cut and spend the other 3/4. 

(*Keep other things unchanged)