Savings and investment

Big economies will have impact on

Key assumptions

One financial market, no buying bonds equities or derivatives .

Savers

make deposits ( supply of loanable funds)

Who is supplying the funds

The savers

Who is going to demand the funds

Whoever wants to burrow to get the loan

Only one interest rate

Both return to saving and both cost of burrowing

Long run

Whenever we talk about the market for loanable funds we think about the long run interest rate, savings and investment determine the real rate

What is the demand for loanable funds

It is the investment, if you present value it, the higher rate the lower profits, the interest rate is the cost of burroiwing

High interest rate

Low investment

If interest rate is low

the oportunity cost of loans, then you invest more, we are going to have a downward sloping demand line

How do you shift the demand for loanable funds curve

ANYTHING ELSE THAT IS NOT INTEREST RATE GENERATES sHIFTS

Technological advancements.

Changes in R

Generate movements along the investment line

New technological processes come out

For a given level of interest rates, theres more funds, so you are moving RIGHT NOT UP,

Stress test

Increasing the cost of burrowing for a loan, for a given in

What leads to an increase in investment for a given level of real interest rate

Increases expectations of future revenues

Decreases of prices of capital goods

Reuces the depreciation rate - ( more durable machines )

What leads to a decrease in investment

Any change in business condistions that makes investment less profitable for a given level of real interest rate

What are the four investment shifters

Technological advances

Expectations

Corporate tax or tax creits

Lending standards and cash reserves

Savings account deposits

If rates are low, not going to save so much, if interest rates go up, the incentives to save are higher, then the supply of loanable funds are going to be bigger

What is the job of the bank

You get deposits from households and loan the deposits to firms, act as a intermediaries: have regulations

movement along the supply

any change in savings that come from the movement of the interest rates.

shifts in savings

anything that changes savings for a given interest rates

TFSA, more savings will occur, RRSP ,

Market for loanable funds

Where supply is = demand.

If r is below equalibrium

The Demand is higher, then it will crash into the equilibrium value.

Excess supply

savers unhappy

Crowing out

The decline in investment from a rise in a budget defecit

Budget deficit raise interest rates, lower the investment which lower the economic growth, which lower the tax revnue, which causes a higher budget deficit and a negatie feedback cycle

What do budget deficits cause

The decrease in investment, since you are crowding out with lower interst rates

If investment goes down

The capital stock will inrease at a lower rate, effecting economic growth, growth rate goes down; lower tax revenue than expected, then a even higher budget deficit

When is savings = investment

ONLY TRUE When net exports is equal to 0

NFI Capital outflows

Measuring the assets that domestic households or agents in the economy are buying abroad

Canadian buying indian assets

Assets in the US, you are giving them your money, and you are given a assets, you are lending money to the rest of the world

NFI capital inflows

If people from the US or India investing into canada, that is called capital inflows

Are net exports and net foreign investments the exact same

YES they are the exact same !!!

If a country has a trade surplus (Exports” Imports)

NFI is positive Country is lending to the rest of the world (Y>C + I + G) if you are exporting a lot of cookies, the country will give you an asset saying that they will pay you back in the future.

Uf a country has a trade deficit (Imports > exports )

NFI is negatve, borrowing from the rest of the world ( Y<c + I +G)

if your expenditures are greater than what you produce, you are lending bonds that will tell you to pay in the future. This is a capital inflow., foreigneers are effectively investing in your country by giveing you cookies now for an IOU in the future - mapping trading goods and trading assets in net terms .

Savings = I + NFI

Y = C + I + G + NX

Y-C-G = S

=I + NX

= I + NFI

Small open economy or Large economy

Canada and US are completely different monsters, small open economy whatever they do will not matter, however the China and India and US, they will effect the economy.

Perfect capital mobility

Canadians can freely investment and burrow from global financial markets

For a small open econmy like canadda this implies thatt interest rates in canada will align with the real interest rate in global markets

Small open economies

PRICE tAKERS

r = RWORLD

Higher WOrld rate for open economies

More canadians are willing to save and lend, increasing the supply of loanable funds, higher rates make burrowing more expensive leading at o a decrease in the demand for domest iv investment

if 2 world large economies open up to trade,

The interest rate has to be the same , and somewhere in between the closed rates of the two econmies

Total savings in the world have to = total investments in the world - Basically when you merge two large econmies together, add their savings and add their investment, so total demand and totalsupply will determine their world interest rates

2 large econmies,

once we open up to trade, what one economy saves the other has to burrow. NFI(a) + NFI(b) = 0, 0 excess savings, and 0 excess demand. the magnitude of the burrowing has to be equal to the magnitude of the burrowing.

The interest rate of the world, has to make the difference of Sa and I a be the difference between Ib and sb

why do we need equal interest rates

When one economy has a high interest rate it will attract all the savers,

and if one economym has a low interest rate it will attract all the investors'

assuming perfect capital mobility.

Trade imbalance of the US 2000-2005

The increase of burrowing from the world was just because the US was just burrownig more, save less and consume more ( DOMESTIC FACTORS))

Aother potential arguement is that foreign savings are increasing why (East asian crisis at the end of 90s, because of that many recovered by getting reserces of US: massive accumalation of capital inflow. putting the money in the US) Foreign savings reductio

domestic factors leads to an increase in interest rates

global factors leads to a decrease in interest rates

If interest rates go down its the foregn

Why do countries borrow or lend in the international markets , use the NFI model

Assumptions you must make

It is a 2 period econoomy

No investment or government purchases

Households smooth consumption

Perfect capital mobilty

Small open economy

B2 is a bond purchased or sold in period 1 that pays at t = 2

Agents are born with zero assets or liabilityies

step two of the NFI model

the present value of the lifetime income equals to the present value of the lifetime consumption