Composition of savings - Saving and Financial Intermediation, Indian Financial system Video Lecture | Indian Financial System - B Com

alright guys welcome to the financial
sector so this is unit for savings
investment and the financial system so
let's start off by relooking at sources
of long-run economic growth I think this
is probably maybe the at least the
second if not the third time in this
course we look at what causes the
economy to grow in the long run which is
obviously of vital importance so we have
increases in human capital and increases
in physical capital and probably the
next slide will say increases in
technology so human capital skills
knowledge of the workforce so how do we
increase our human capital well by
better education and also by population
growth not the vet necessarily increases
the skills and knowledge but it gives us
more workers so that also and hopefully
they're bringing different skills and
different knowledge with them also so we
have human capital the one that we're
gonna focus on and this unit
specifically will be increases in
physical capital
remember that physical capital is
referring to goods that are used to make
other goods and services so we're
talking about machinery factories
tractors tools things like that and the
key of why that matters in this unit
because we're talking about the
financial system is how do we pay for
those things for that physical capital
well it's financed by investment
spending and again this is at least the
second if not probably the third or
fourth time that that statement has come
up as well and so here is a really
important statement that investment
spending is what finance is long-run
economic growth when it comes
specifically to increasing our physical
capital so it is gonna be hugely
important so well there you go there's
your definition for investment spending
spending on new physical capital what
matters in this unit is how much does it
cost to engage in investment spending
and that's gonna be determined by the
interest rate so this unit a lot of it
is about what makes interest rates go up
and down and how that will then affect
the economy as a whole so the interest
rate we're going to say is the
price of money in again that's probably
a different concept to think about money
costing something but it really does if
you want to take out a loan for a
thousand dollars let's say and the
interest rate is five percent or the
interest rate is ten percent
well if the interest rate is only five
percent then that alone is cheaper so
the price of borrowing that thousand
dollars is cheaper than if it were ten
percent so an interest rate really is a
price of money so why does that matter
well this is pretty much common sense
but if you have a higher interest rate
we are not going to borrow as much and
remember that borrowing is the way that
investment spending is primarily
financed so most companies don't just
build a new factory with money that they
already have or most businesses don't
begin their business with money they
already possess they usually have to
borrow that money so when the interest
rate goes up we're gonna have less
investment spending because it's more
expensive to borrow when the interest
rate Falls we're going to have more
investment spending because it's cheaper
to borrow money and again remember that
this investor spending is gonna have a
direct impact on how much new physical
capital we have which has a direct
impact on our long-run economic growth
so these things are very closely related
to each other alright so again how and
doesn't spending is financed we have
something called the savings investment
spending identity and it's very simple
it sounds complicated with all those
words it is just basically a proof that
savings is equal to investment spending
s equals I and this is saying
mathematically the amount of savings
that an economy has is going to be equal
to its investment spending so what this
means is that when you save your money
and this has to be that you were saving
it in a bank or some kind of financial
institution saving under your bed or in
your mattress under your mattress
doesn't count because no we can borrow
that
but the basic idea is that you save your
money in a bank and in the bank can lend
out that money to people for investment
spending so savings will be equal to
investment they cannot lend out what has
not been saved all right now government
spending is also going to influence this
as well we have three terms here there's
just a little bit of vocab the next
couple of slides we have budget balance
surplus and deficit these are pretty
basic budget balance is the difference
between tax revenue and government
spending so we can say that we have a
positive budget balance or a negative
budget balance if it's a positive one
then that would be better known as a
budget surplus but just be aware you
might see it as a positive budget
balance surplus we had this back in the
late 90s into 2000 tax revenue is
greater than government spending
obviously we haven't seen that in a
little while but deficit we are more
familiar with budget deficits these days
and you can see on this chart since 2002
the huge deficits that we've run they're
actually a little bit smaller now than
they were
that's probably surprising to a lot of
people but either way deficit tax
revenues less than government spending
all right so why does that matter
well because we have this term called
national savings so it's not just money
that people are saving it also includes
the budget balance so national savings
is the total amount of savings in the
economy and it is equal to private
savings so that's what regular private
citizen save plus the budget balance in
our case in the United States since 2001
we have run a negative budget balance so
that would actually be adding a negative
number so when we say that savings
equals investment spending it's not only
private savings it's national savings so
the government when they borrow they are
actually taking away some investment
spending when the government is spending
more than the
bringing in when they have a budget
deficit so our number right now private
savings is a positive number
budget balance is a negative number so
our investment spending is less than
private savings but it is still equal to
the national savings because it has to
be all right how do we define private
savings again this is just a recap of
old stuff disposable income minus
consumption that's pretty much it we've
done math before so that's everything
left over either save or consume from
our disposable income so that's private
savings there is another source of
savings as well and this would be
through capital inflows and outflows so
capital inflows that's the net inflow of
money or funds into a country so and
this is something we're going to get
into a lot more when we get to
international trade into an open economy
section and this unit we're gonna mostly
view the economy as closed but the basic
idea is that money sometimes comes into
a country from somewhere else
foreign savings that can finance
investment spending so people from
another country they might spend or I'm
sorry they might save their money in the
banks of another country so somebody
from Portugal or Greece or Italy
countries that have weaker economies
they might choose to save their money in
an American bank and that's gonna be
money that we can use for investment
spending here outflow funds just the
opposite it would be where Americans
save their money in other countries so
that would be domestic savings that
finance investment spending in another
country like I said in this unit we're
not gonna focus on this one too much
we'll do this later in the course
so to recap investment spending is
financed by private savings the
government budget balance which when we
add those two things up that's gonna
equal our national savings and also by
capital inflows so that's where we can
get our investment spending from this is
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