Saving and Capital Formation Chapter 9

Saving & Wealth Saving : flow Wealth: stock

Three Types of Saving Life cycle Precautionary Bequest

National Saving and Its Components The Measurement of National Saving –National Saving (S) = Y - C - G

National Saving and Its Components Private and Public Components of National Saving  National Saving (S) = Y - C - G  T (net taxes) = private sector tax payments – (transfer payments and interest payments)  S = Y - C - G + T - T  S = (Y - T - C) + (T - G)  Private saving = S private = Y - T - C  Public saving = S public = T - G

National Saving and Its Components Private and Public Components of National Saving –Two components of private saving (S private =Y - T - C) Household (personal) saving Business saving

Household Saving Rate in the United States, Observations Household saving has fallen dramatically National saving has not declined in recent years

National Saving and Its Components Private and Public Components of National Saving –S public = T - G –Includes Federal State Local

National Saving and Its Components Government Budget Deficit –The excess of government spending over tax collections (G - T)

National Saving and Its Components Private and Public Components of National Saving S = (Y - T - C) + (T - G) S = S private + S public National Saving (S) is composed of saving by households, businesses, and government (federal, state, and local) PrivatePublic

U.S. National Saving Rate,

The Three Components of National Saving,

Determinants of Investment Price of capital goods Cost of funds (real interest rate) Taxes on profits of capital Prices of final goods Productivity of capital

Supply and Demand Again Supply of savings meets the demand for investment.

Global Savings Glut? If the U.S. runs a current account deficit, it will use up savings from other nations. Which comes first: current account deficit or flow of saving from other nations?