Ch 23 - Finance Saving and Investment

Friday, April 06, 2012

6:51 PM

Finance	Provide funds to bring expenditure on capital goods
Money	Medium of exchange used for goods/services, settle financial transactions

 

Physical capital	Tools, instruments machines
Financial capital	Funds that firms use to buy physical capital.

 

Gross investment	Spending on purchases of new capital AND replacing depreciated capital
Depreciation	Decrease in quality from wear and tear
Net investment



 

 

Wealth	Values of all things people own. (not income) Increases with: Saving Capital gains (increase in value of owned assets)
Saving	Amount of income that is not consumed (after taxes) Important because it source funds for investment in capital

*Financial markets uses savings for investment, supplied by savers and demanded by investors

 

Financial Markets

Loan Markets	One party lends money to another party. Used by consumers & business owners Obtained from banks, credit unions… Paid back with interest over time Sometimes need collateral
Bond Market	Agreement to pay back an amount of money with interest. Bond issuer = Borrower Bond holder = Lender   Used by governments Varying maturities (1 yr, 10 yrs, 30 yrs)
Stock market	Share of ownership (equity) of a company Entitles owner to share profits Traded in stock markets. Profit comes from dividends, no interest.

 

Financial institution	Firm that operates on both sides of markets for financial capital
Examples	Banks Trust & Loan companies Credit Unions - co-op bank Pension Funds Insurance companies

 

Net worth
Insolvency	Negative net worth. Generally go out of business More serious than illiquidity
Illiquidity	Lack cash flow. Have positive new worth, but can't generate funds to pay current expense Can always borrow. On

 

 Market for Loanable Funds

 



 

When one sector saves, the other one must borrow.

 

Nominal Interest Rate	Number of dollars a borrow pays to the lender in interest in %
Real Interest Rate

 

Demand for Loanable Funds	Curve between real interest rate and quantity of loanable funds demanded
Determinants	Expected profit (Direct)

 

Supply for Loanable Funds	Curve between real interest rate and quantity of loanable funds supplied
Determinants	Disposable income (Direct) Expected future income (Indirect) Wealth (Indirect) Default risk (Indirect) Government Budget (Direct)

 

Crowding Out	Instance where: Government borrows Interest rate rises Business investment falls Aggregate demand falls Government borrowing will reduce private business spending through higher interest rates
Ricardian Equivalence	Financing government spending by taxing now, or by borrowing now and taxing alter. This causes anticipation of higher tax rate. This will cause people to save. Thus the increase in saving will offset government's borrowing.

 

 Global

 

People seeks the highest and lowest interest rates regardless of national borders.

Capital is "mobile".