1. Saving and Investment Chapter 6

2. 2 Consumption and GDP in the United States Panel A Percentage deviation from trend -20 -10 0 10 20 Time 1955 ’60’65’70’75’80’85’90 GDP Consumption Figure 6.1A ©1999 South-Western College Publishing

3. 3 Investment and GDP in the United States Panel B Percentage deviation from trend -20 -10 0 10 20 Time 1955 ’60’65’70’75’80’85’90 GDP Investment Figure 6.1B ©1999 South-Western College Publishing

4. 4 How Smooth is Consumption? GDPConsumptionInvestment Standard Deviation Standard Deviation relative to GDP 2.58 1.000.763.34 Table 6.1 ©1999 South-Western College Publishing

5. 5 Investment Consumption Current Income Future Income E O D A The Intertemporal Production Possibilities Set Figure 6.2 B ©1999 South-Western College Publishing

6. 6 Investment I (Investment today) Y (Value of commodities produced tomorrow) O I1I1 Maximizing Profits 33 22 11 Figure 6.3 Y1Y1 ©1999 South-Western College Publishing

7. 7 I (Investment) Y (Output) OIAIA Panel A YAYA AA Slope (1 + r A ) Figure 6.4A A ©1999 South-Western College Publishing Deriving the Investment Demand Curve

8. 8 I (Investment) Y (Output) O IBIB Panel B BB YBYB B Slope (1 + r B ) Figure 6.4B ©1999 South-Western College Publishing Deriving the Investment Demand Curve

9. 9 I (Investment) r (Real estate interest) 0 IAIA Panel C rArA rBrB Investment demand curve Figure 6.4C IBIB ©1999 South-Western College Publishing Deriving the Investment Demand Curve

10. 10 Future consumption Present consumption Consumption Saving (Y 1 - C 1 ) C2C2 Y2Y2 C1C1 Y1Y1 A E Maximizing Utility Over Time Figure 6.5 U1U1 U2U2 U3U3 (1+r) ©1999 South-Western College Publishing

11. 11 Future consumption Present consumption Y2Y2 Y1Y1 SASA A E Slope (1 + r A ) Panel A Deriving the Saving Supply Curve Figure 6.6A ©1999 South-Western College Publishing

12. 12 Future consumption Present consumption Y2Y2 Y1Y1 SBSB B E Slope (1 + r B ) Panel B Figure 6.6B ©1999 South-Western College Publishing Deriving the Saving Supply Curve

13. 13 Saving Panel C r (Real interest rate) rArA rBrB SASA SBSB 0 Figure 6.6C ©1999 South-Western College Publishing Deriving the Saving Supply Curve

14. 14 Saving and investment Saving and Investment in a Closed Economy r (Real interest rate) r1r1 rErE S1S1 0 Figure 6.7 I E = S E I1I1 Saving supply curve Investment demand curve ©1999 South-Western College Publishing

15. 15 Investment Output O I 1 (r 1 ) Panel A Y2Y2 Y1Y1 Slope (1 + r 1 ) Figure 6.8A I 2 (r 1 ) Production function 2 Production function 1 ©1999 South-Western College Publishing Productivity and the Investment Demand Curve

16. 16 Saving and investment Productivity and Investment Demand Panel B r (Real interest rate) r1r1 r2r2 0 Figure 6.8B I1I1 Saving supply curve Investment demand curve 2 I2I2 Investment demand curve 1 (r1)(r1) (r2)(r2) I1I1 (r1)(r1) ©1999 South-Western College Publishing

17. 17 Saving and investment Saving and the Baby Boom Panel A r (Real interest rate) r2r2 r1r1 0 Box 6.2A I1I1 Saving supply in 1939 Investment demand I2I2 Saving supply in 1970 ©1999 South-Western College Publishing

18. 18 Saving and investment Saving and the Baby Boom Panel B r (Real interest rate) r2r2 r1r1 0 Box 6.2B I1I1 Saving supply curve in 2020 Investment demand curve I2I2 Saving supply curve in 1990 ©1999 South-Western College Publishing

19. 19 Government Debt and Pension Liabilities as Percent of GDP in 1990 Canada Germany 52 121 22 157 Table 6.3 Net Conventional Debt Net Pension Liabilities Italy United Kingdom United States 100 27 35 259 156 90 Source: Max Alier, Essays on pension reform, Ph.D. thesis, UCLA, 1997. ©1999 South-Western College Publishing

20. 20 Domestic Saving and investment Saving and Investment in an Open Economy Panel A r (Real interest rate) r1r1 r2r2 I 2 TOT 0 Figure 6.9A I 1 TOT Saving supply curve Investment demand curve S 1 TOT S 2 TOT NB 1 > 0 NB 2 < 0 ©1999 South-Western College Publishing

21. 21 Quantities of capital demanded and supplied NB 2 O NB E NB 1 r (World real interest rate) rErE r1r1 r2r2 A B C World supply of capital to the U.S. U.S. demand for capital from the world Figure 6.9B ©1999 South-Western College Publishing Saving and Investment in an Open Economy Panel B

22. 22 Real interest rateTrade surplus Budget deficit Budget Deficit and Trade Surplus Panel A Percentage of GDP 1970’73’76’79’82’85’88’91’94 -6 -4 -2 0 2 4 6 8 10 Figure 6.10A ©1999 South-Western College Publishing

23. 23 Quantities of capital demanded and supplied r(World real interest rate) rArA rBrB 0 Figure 6.10B World supply of capital to the U.S. U.S. demand for capital 2 NB A U.S. demand for capital 1 B A NB B ©1999 South-Western College Publishing Panel B

24. END