Presentation is loading. Please wait.

Presentation is loading. Please wait.

Integrated Markets Part IV Feldstein-Horioka. Saving = Investment Elementary macroeconomics tells us that the above must be true Elementary macroeconomics.

Similar presentations


Presentation on theme: "Integrated Markets Part IV Feldstein-Horioka. Saving = Investment Elementary macroeconomics tells us that the above must be true Elementary macroeconomics."— Presentation transcript:

1 Integrated Markets Part IV Feldstein-Horioka

2 Saving = Investment Elementary macroeconomics tells us that the above must be true Elementary macroeconomics tells us that the above must be true More advanced economics keeps this equality but modifies it with realistic additives like the current account and the government budget (Ex – Im and G – T) More advanced economics keeps this equality but modifies it with realistic additives like the current account and the government budget (Ex – Im and G – T)

3 Digression on Why Advanced macroeconomics presents the elementary I = S as the more complicated Advanced macroeconomics presents the elementary I = S as the more complicated I + G + Ex = S + T + Im I + G + Ex = S + T + Im Consumers (general public) may produce all of GDP, but they purchase only about 2/3 Consumers (general public) may produce all of GDP, but they purchase only about 2/3

4 First I + G + Ex These are non-consumer components of total demand: investors (businesses) buying their machines & other items; the government buying its energy, education, infrastructure; foreigners buying our exports These are non-consumer components of total demand: investors (businesses) buying their machines & other items; the government buying its energy, education, infrastructure; foreigners buying our exports

5 Now S + T + Im This is a supply concept This is a supply concept The three terms add up to be components of GDP not purchased by consumers The three terms add up to be components of GDP not purchased by consumers But consumers (general public) produced these components But consumers (general public) produced these components By not purchasing them, they “supply” these goods for others By not purchasing them, they “supply” these goods for others

6 In Other Words GDP = Gross Earned Income = C + S + T + Im GDP = Gross Earned Income = C + S + T + Im C is spent on consumption C is spent on consumption S + T + Im is money not spent (goods not purchased), but the money goes to financial institutions, the government and to foreigners S + T + Im is money not spent (goods not purchased), but the money goes to financial institutions, the government and to foreigners

7 Finally Financial institutions lend the money to consumers, the government & business Financial institutions lend the money to consumers, the government & business The government transforms its share (T) into spending (G) The government transforms its share (T) into spending (G) Foreigners use the money to spend or invest in our country (Ex or capital inflow) Foreigners use the money to spend or invest in our country (Ex or capital inflow)

8 Saving  Investment In a relatively closed economy, S & I normally rise & fall together: S  I In a relatively closed economy, S & I normally rise & fall together: S  I In an open economy, this link is broken: S  I In an open economy, this link is broken: S  I Big saving countries lend to low savers Big saving countries lend to low savers

9 Some Macroeconomics S – I = G – T + Ex – Im S – I = G – T + Ex – Im = G – T + CA = G – T + CA = G – T – KA = G – T – KA So, S + KA – I = G – T So, S + KA – I = G – T Whatever fiscal policy may be (G – T), saving & investment are separated by capital account Whatever fiscal policy may be (G – T), saving & investment are separated by capital account

10 S + KA – I = G – T If G – T  0, a low saving country with good investment possibilities will have a capital inflow (KA > 0) If G – T  0, a low saving country with good investment possibilities will have a capital inflow (KA > 0) If G – T is large & positive (deficit), KA will be correspondingly large & positive (USA) If G – T is large & positive (deficit), KA will be correspondingly large & positive (USA) Japan? Vietnam? Korea? Japan? Vietnam? Korea?

11 Final Note These four market standards actually fail to indicate much integration beyond the fairly tight relationship between USA and Japan These four market standards actually fail to indicate much integration beyond the fairly tight relationship between USA and Japan Not even USA & most European countries Not even USA & most European countries


Download ppt "Integrated Markets Part IV Feldstein-Horioka. Saving = Investment Elementary macroeconomics tells us that the above must be true Elementary macroeconomics."

Similar presentations


Ads by Google