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45 Cards in this Set

  • Front
  • Back
Why do Individuals Save?
1. Meet future expenditures
2. To protect against an economic emergency
Why do Nations save?
1. To produce new capital goods - to promote growth and hight standards of living in the future
2. National saving = savings by households, businesses and governments
Saving of an economic unit =
current income - spending on current needs
Saving rate of ANY economic units =
Saving divided by its income
Wealth =
The value of assets minus liabilities
Assets =
Anything of value that one owns either finicial (cash, stocks, bonds, etc.) or real (real estate, jewelry, consumer durables like cars etc.)
Liabilities =
debts one owes (credit card balances, loans, mortgages,etc.)
Net Worth =
comparing an economic unit's assets and liabilities
Balance Sheet =
the particular date that this comparison is made (net worth)
Flow =
A measure that is defined per unit of time (e.g. savings)
Stock =
A measure that is defined at a point in time (e.g. wealth)
Every dollar a person saves adds to his/her _______
WEALTH
The flow of saving causes the
stock of wealth to change
Capital Gains =
increase in the value of existing assets - may decrease the urge to save
ex: higher value of a stock
Capital Losses =
decrease in the value of existing assets - may increase the urge to save
ex: decrease in house prices
Capital gains are part of _____
WEALTH
Change in Wealth =
saving + capital gains - capital loss
US rates of savings are generally
low
low household saving can be offset by
savings by businesses or government
Savings in Japan
Highest rate in 2007
How did Americans increase their wealth during the 1990s, while household savings fell? (Bull Market)
more stocks acquired with enormous capital gains
leading to increased wealth
Low household saving a problem?
Macro- No
Micro- Yes: problem of growing inequality in wealth, richer get richer and the poor get poorer
Y = C + I + G + NX
Y=real income or expenditure
C=consumption
I=investment
G=government
NX=net exports
National Saving (S) =
Current Income (Y) - spending on current needs
Net Taxes (T) =
Total taxes - Transfer payments - government interest payments
Private saving =
the after tax income of the private sector minuw consumption expenditures
Y - T - C
Public saving =
the saving of the government sector is net tax payments minus government purchases
T - G
Private Saving is done by
households and businesses
Government Budget Surplus
the excess of government tax collections over government spending
T - G, IT EQUALS PUBLIC SAVING
Government Budget Deficit
the excess of government spending over tax collections
G - T
Balanced Budget =
G = T
Reasons for change in government budget
lower income (lower taxes), government spending increased (wars, homeland security)
Life-cycle saving =
saving to meet long-term objectives - retirement, college attendance, purchase of a home
Precautionary Saving =
saving for a 'rainy day' - loss of a job, medical emergency
Bequest Saving =
saving for the purpose of leaving an inheritance -small business, farms, wealthy individuals
What makes people not save?
social security, medicare
mortgages
confidence
increasing value of stocks
readily available home equity loans
Investment =
the creation of new capital goods and housing - is necessary to increase average labor productivity
National Saving is
the source of funding for investment
Substitution effect =
increases the return on savings and the opportunity cost of consumption
Wealth (income) effect =
Increases wealth, reduces the savings needed to achieve goals
Supply of savings (S)
the quantity supplied of saving is positively related to the real interest rate (r)
Demand for Saving (I)
the quantity demanded for saving is negatively related to the real interest rate (r)
Market of Savings
market will determine equilibrium
-if r is above equilibrium a surplus of savings will exist and vice versa
Crowding Out =
the tendency of govt. budget deficits to reduce investment spending, leads to lower capital formation and lower rate of economic growth
How can we increase National Saving?
reduce govt. budget deficit, increase incentives for households