Lecture_4_Frank8e_Chapter21_Saving_New(2)
Page 1: Introduction
Saving and Capital Formation
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Focus on understanding the principles of saving and capital formation in economics.
Page 2: Learning Objectives
Understand the relationship between savings and wealth.
Identify the reasons why people save.
Explore the components of national saving.
Examine the role of national saving in the economy.
Differentiate between bonds and stocks.
Page 3: Savings and Wealth
Definition of Saving: Current income minus spending on current needs.
Saving Rate: Saving divided by income.
Definition of Wealth: Value of assets minus liabilities.
Assets: Anything of value owned.
Liabilities: Debts owed.
Balance Sheet: A list of an economic unit’s assets and liabilities on a specific date (business, household, etc.).
Page 4: Consuelo’s Balance Sheet
Assets:
Cash: $80
Checking account: $1,200
Shares of stock: $1,000
Car (market value): $3,500
Furniture (market value): $500
Total Assets: $6,280
Liabilities:
Student loan: $3,000
Credit card balance: $250
Total Liabilities: $3,250
Net Worth Calculation: Assets - Liabilities = $3,030
Page 5: Activity 1: Calculation of Balance Sheet
Assets and Liabilities Listing:
Cash on-hand: AED150,000
Savings accounts: AED200,000
Real estate market value: AED1,000,000
Total liabilities: AED135,000
Analyze whether each item is an asset, liability, or neither.
Page 6: Activity 2: Further Balance Sheet Calculation
Hypothetical Assets and Liabilities:
Cars: $15,000; House: $400,000; Mortgage: $300,000.
Cash: $1,000; Car loans: $5,000; Credit card balance: $3,000.
Tasks:
Calculate total assets, total liabilities, and net worth.
Page 7: Inflation Rate and Purchasing Power
Example: Pizza price changes from AED25 in 2020 to AED33 in 2021.
2020: 1,000 / 25 = 40 pizzas.
2021: 1,000 / 33 = 30 pizzas.
Conclusion: Inflation decreases the purchasing power of AED1,000, as fewer pizzas can be bought.
Page 8: Saving and the Real Interest Rate
Financial Assets: Include bonds, savings accounts, mutual funds, stocks, etc.
Real Interest Rate: Formula: r = i - p
Positive real interest rates ensure growth in savings over time.
Page 9: Understanding Interest in Saving Scenarios
2020 Example: $1,000 at a nominal interest rate of 50% leads to a total of $1,500 in 2021.
Inflation affects purchasing power; calculate how many pizzas can be bought.
Page 10: Capital Gains and Losses
Wealth changes due to value fluctuations of assets.
Capital Gains: Increase in asset value; Capital Losses: Decrease in asset value.
Examples:
House sale profit, changes in stock prices (examples given).
Page 11: Reasons for Household Saving
Life-cycle Saving: To meet long-term goals (retirement, education).
Precautionary Saving: Protecting against unforeseen setbacks (job loss, emergencies).
Bequest Saving: Savings meant to leave inheritance; prevalent among upper-income households.
Page 12: National Savings Overview
Macroeconomics examines total savings in the economy.
Components: Household savings, business savings, and government savings.
Income identity: Y = C + I + G + NX (where Y = income).
Page 13: National Saving Equation
National Saving (S): Calculation: Y - C - G
Private Saving: Y - T - C
Public Saving: T - G
Page 14: Calculating National Savings
National savings (S) = Current income based on GDP.
Focus on current needs: S = Y - C - G; investment is not included.
Page 15: Understanding Private Saving
Private saving includes both household and business savings.
Total Income: Y; Taxes affect disposable income.
Transfer payments impact household income.
Page 16: Private Saving Continued
Definition: Private saving = after-tax income - consumption.
Majority from businesses comprising revenues minus operating costs and dividends.
Page 17: Public and National Saving
Public saving is the income the public sector does not spend.
Equation: National Saving = Private Saving + Public Saving.
Page 18: Activity: National Saving Calculation
Closed economy focus: Information on C, G, GDP provided.
Calculate government budget, private saving, and national savings based on given data.
Page 19: The Government Budget
Balanced Budget: Government spending = net tax receipts.
Definitions: Surplus, deficit, and their implications.
Page 20: Reasons for Saving by Countries
Efficient allocation of savings to productive investments is vital.
Banks and financial markets connect savers to borrowers for capital investment.
Increased saving leads to higher investment and GDP growth.
Page 21: Bonds Overview
Bonds are issued by corporations/governments; they promise repayment of debt.
Each bond has a principal amount, maturity date, and coupon payments.
Page 22: Example of a Bond
Details on a US government bond, its principal, term length, and coupon payment calculation.
Page 23: Stocks Overview
A stock represents ownership in a company with potential dividends and capital gains.
Stock prices are determined by the market.
Page 24: Rate of Return on Stocks
Calculation of rate of return based on capital gains and dividends.
Example with specific financial figures presented.
Page 25: Activity: Calculating Stock Returns
It involves calculations for capital gain and total return on a stock purchase.
Page 26: Summary: Stocks vs. Bonds
Stocks: Ownership, riskier, dividends not fixed, no maturity date.
Bonds: Debt instrument, lower risk, fixed income, has a maturity date.
Page 27: Identification Activity
Classify items as stocks, bonds, or neither based on characteristics and descriptions.