U5 Cram

To raise productivity, firms and households invest in human capital (skills and knowledge) and increases in physical capital (goods used to make other goods) to become more productive

• physical capital is often expensive so firms and individuals must borrow money in order to create/pay for it.

know what interest rate means

savings-investment spending identity, savings and investment spending are always equal for the economy as a whole.

• savings always equals investment spending

Budget surplus, difference btwn tax revenue and government spending when tax revenue exceeds government spending

Budget deficit, difference btwn tax revenue and government spending when government spending exceeds tax revenue

Budget balance is the difference btwn tax revenue and government spending

National savings is the sum of private savings and the budget balance

• total amount of savings generated within economy

Capital inflow

• total inflow of foreign funds minus total outflow of domestic funds to other countries

When adding capital inflows or outflows to the savings-investment spending identity → investment spending = national savings plus capital inflow

Financial markets are where households invest their current savings + accumulated savings (wealth) by purchasing financial assets

Financial asset:

• paper claim that entitles the buyer to future income from the seller

• physical asset is a claim on a tangible object that gives the owner the right ti dispose of the object as he or she wishes

liability is a requirement to pay money in the future

3 Tasks of a Financial System

• reducing transaction costs

  • transaction costs are the expenses of negotiating and executing a deal

• reducing risk

  • financial risk is uncertainty about future outcomes t hat involve financial losses and gains

• providing liquidity

  • an asset is liquid if it can be quickly converted into cash without losing too much value (illiquid is opposite)

  • by making it easier to buy/sell assets, a financial system makes all these assets more liquid than they would be without a financial system