Saving and Investment - India’s five year plans, Indian Economy Video Lecture | Indian Economy - B Com

saving investment in the financial
system this chapter is an excellent
follow-up to the previous one discussing
production and growth and that chapter
we learned that investment which is the
accumulation of capital is important
because it leads to a higher standard of
living in the long run but what
determines how much investment but you
have to take a look at what determines
how much investment a country undertakes
that's the essential central question of
this chapter again what determines how
much investment a country undertakes so
after some introductory information
about various types of financial
institutions this chapter focuses on
saving and investment you will learn the
difference between private and public
saving and the definitions of government
budget budget surpluses and deficits now
there is a brief review of the
difference between saving and investment
that is very useful and for you as
entry-level students there's often a
term called
investment and what we're saying there
is we mean saving so when you hear
investment think saving the most
analytical part of this chapter is the
coverage of the closed economy
vulnerable funds model however this
model uses the tools of supply and
demand which we introduced in chapter 4
so you should be familiar with that
now the loanable funds model shows how
the interest rate adjusts to quite
saving and investment in a closed
economy you will also learn how
government budget deficits can crowd out
investment and which is actually one of
the bigger issues in macroeconomics so
let's get started now financial
institutions what are they well the
financial system is a group of
institutions that help match the saving
of one person with the investment of
another so you have savers and you have
people who need to borrow or well you
have savers and you have people in to
borrow but you also have people that
have investment opportunities that's a
financial system now financial markets
are institutions through which savers
can do
Rek lepra vide funds to borrowers
examples of financial markets are the
bond market a bond is a certificate of
indebtedness in the stock market a stock
is a claim to partial ownership and a
firm now most people think of the stock
market
you literally own a piece of a firm and
the bond market in which you may be less
familiar with is you're essentially
giving small loans to the borrower now
financial intermediaries are needed and
financial intermediaries are
institutions through which savers can
indirectly provide fun excuse me
provide funds to borrowers examples
include banks obviously they provide
loans and also mutual funds which are
institutions that sell shares to the
public and use the proceeds to buy
portfolios of stocks and bonds so this
chapter a big part of your success in
this chapter is going to be wrapping
your mind around the reading and getting
the terms down pat so be sure you're
doing that so there's different kinds of
saver first there's private saving which
is the portion of households income that
is not used for consumption or paying
taxes now here we have our income here
why tea is not just for taxes it's
actually transfer payments now taxes are
a form of transfer payments and C is
consumption so your income minus what
you pay the government say in transfers
in the form of taxes and then obviously
- what you spend whatever you have left
over after all that is something that
you can use for private saving now
public saving is tax revenue less
government spending so you take the tax
revenue here the transfer payments T and
you take out what the government spends
okay so if the government is running a
surplus you're gonna have some money for
public saving if a government is running
a deficit meaning they're spending more
money than they're bringing in you're
not gonna have some money for public
saving I pretty much anyone can guess
what we're doing in America right now so
just in case you get curious tea here
and in generals is a net
of transfer payments and general saving
is just some measure of income - some
measure of expenditure just whatever you
have left over from private household
saving the measure of income is
disposable income or gross income minus
taxes in other words your take-home pay
and the measure of expenditure is your
consumption for public government saving
the measure of income is T which is
total taxes which is the government
source of income so it's how you know
government makes money through taxes the
measure of of expenditure is simply G
which is whatever the government
purchases now in case of national saving
which is covered on the next slide the
measure of income is GDP which we've
talked about before and the measure of
expenditure is consumption plus
government expense expenditure so C plus
G now national saving again is private
saving plus excuse me
private saving plus public saving so we
had our private saving your income minus
what you pay in taxes - what you consume
is your private saving and then public
saving your tax revenue coming into the
government and then what the government
spends whatever you have left over can
be used for public saving so you add the
two savings together you have national
saving now you can simplify this
equation by cancelling out the T's and
here you just have your income minus
your consumption - what the government's
been so you have total income in this in
this form is going to be go back to Y
being GDP - what people spend - what the
government spends and that's your
national saving okay so national saving
is the portion of national income that
is not used for consumption or
government purchases so now recall that
the national income accounting identity
is GDP it's why equals consumption plus
investment plus government spending plus
net exports now for the rest of this
chapter we're gonna focus on the closed
economy case okay so we're not going to
pay attention to imports and exports
we're gonna drop net exports so we're
gonna look at the income being
consumption plus investment plus
government spending so here you can
solve for I you
solve for investment because that's what
we're concerned with here literally it's
just rearranging the equation y equal
our I excuse me investment equals y
minus C minus G so your income minus
your consumption - your government
spending so that translates back to our
previous level we say national saving
was y minus t minus e which is private
saving plus whatever we have public
saving which is t minus g can we cancel
the t's out we have y minus e u minus G
okay so saving is the investment in a
closed economy so for this particular
portion of this chapter and/or this rest
this chapter we're gonna look at a
closed economy so we're not we're not
considering net exports here we're not
looking at import and export so in
defense of using a closed economy
assumption while it's true that most
economies are open the closed economy
case is easier to learn all right so
it's easier to learn so you should be
all about it right there from the get-go
but we can still learn a lot about how
the world works by studying a closed
economy we just make a lot of
assumptions that they're not making
trade ok a later chapter
that we'll go over we're going to add
international trade and capital flows to
this model but for now I want you guys
to learn it in a closed economy
situation now budget deficits and
surpluses big deal a budget surplus is
when there's an excess of tax revenue
over government spending in other words
the tax revenue the government brings in
is greater than you government spending
you have that in the form of public
saving then budget deficit much more
likely giving I don't know our last 50
years mostly in the u.s. budget deficits
our shortfall of tax revenue from
government spending I shouldn't I
shouldn't poopoo all politicians there
have been some balanced budgets Reagan
did it at least once Clinton did it
maybe at least twice so it's not really
a donkeys and elephants issue it's
something that can be done it's just
unfortunately hasn't been done here
lately balancing a budget having a
surplus that is now budget deficits
again much more likely as a recent
history has shown us it's a shortfall
tax revenue from government spending now
you take government spending - the tax
okay then you have a negative public
saving because you have a deficit you
have more bills you've you bought more
things than you have money for now let's
look at an example do some calculations
this exercise asks you to apply the
concepts from the preceding slides that
are kind of a problem that you might see
say on the coming exam given the
following let's make some calculations
import a here suppose GDP equals 10
trillion dollars consumption equals six
point five trillion dollars the
government spends two trillion and has a
budget deficit of 300 billion big
numbers right let's find the public
saving taxes private saving national
saving and investment all right so if
you want to pause this right now and
just jot those things down so you can
follow along in your notes that's great
but we are about to move to the next
slide now all of these numbers are in
trillions of dollars okay so let's get
that done let's get that out there and
off the start they're all in trillions
of dollars we're just simplifying them
so we don't have a bunch of zeros on
this slide now we're given income of ten
trillion they have consumption of 6.5 we
have government spending of two and the
g- t government - the taxation is that
be 300 billion okay point three trillion
okay public saving again is t minus g so
we would just say t minus g is negative
zero point three that would be three
hundred million so public saving is in a
deficit of 300 million taxes is t equals
g - that public saving which is one
point seven trillion then so it tells us
how many taxes we have again if you want
to rewind here do the math it might help
you on the test private saving then from
the previous slides we know is y minus t
minus e your income minus the the taxes
you have to pay the transfer payments
you have to pay
and consumption so that equals ten given
above minus one point seven which we
calculated in taxes - the six point five
which is our consumption some private
savings one point eight really national
savings then we take Y - C - G okay from
a previous slide we know Y is ten
because that's given we know C is six
point five consumption and that leaves
us actually should be minus - naught
equals two so this should be a minus
sign go ahead fix that - well I could
find - - okay so that leaves us one
point five trillion dollars in national
saving investment on national scale is
your national saving one point five
trade
so that's part A Part B how attacks how
tax cuts affect saving use the numbers
from the preceding exercise that we
calculated but now so but suppose now
that the government cuts taxes by 200
billion hey that's great awesome
everybody's happy and which of the
following two scenarios excuse me in
each of the following two scenarios and
determine what happens to public saving
private savings national savings and
investment see we're talking about all
those terms you're gonna have to take
some time to read this chapter perhaps
even reread it so you know what these
things are when I rattle them off as a
test question first consumers save full
proceeds of the tax cut okay that's the
first scenario consumers say full
proceeds of the tax cut they just save
it they said man that's great I'm gonna
save all his money
the second scenario consumers save only
a quarter of the tax cuts one-fourth of
the X cut and they spend the other
three-fourths he's like alright let's go
to sizzler let's spend this money
alright
this exercise is designed to teach an
important lesson and prevent a common
mistake among many students so when you
are asked they only exam for example to
determine the effects of a tax cut on
national saving investment and interest
rate many maybe students will mistakenly
state that the tax change has no effects
on because taxes are positive or
positively an expression of public
saving
negatively an expression of private
savings so it's money coming in for the
government's money going out for the
private folks and not all the expression
and not at all in the expression
national saving which is that why I'm on
a c-minus G this exercise gets you to
see the effects of the tax cut on
national saving and investment depending
on behavior consumers now immediately
following this exercise we're going to
look at a discussion question designed
to help you realize that tax cut will
most likely cause consumption to rise in
national savings to fall so you can I
have to fall along here again if I'm
taking all this time to explain these
scenarios might mean something come test
time right so now so let's get started
mmm-hmm let's look at the answers to
Part B in Part B we're looking two
scenarios here where consumers say full
proceeds of the tax cut in the first
scenario on the other scenario they only
save a quarter and spend the other
three-fourths now I both scenarios
public saving does fall it falls about
two hundred billion well that's the
money that the government gave back in
terms of lowering taxes now the budget
deficit Rises from 300 billion to five
hundred billion that's that same 200
billion okay we don't have that tax
revenue coming in so the deficit goes up
alright so in the first scenario of
consumers save the full 200 billion
national saving is unchanged so
investment is unchanged alright remember
that tie between national saving and
investment now in the second scenario if
consumers save 50 billion in spend a
hundred and fifty billion okay they
saving 50 billion to one quarter and
they're spending three-fourths of 150
billion that'd be nice right
then national saving and investment each
fall by 150 billion okay national saving
and investment each fall by 150 billion
is that 3/4 amount it's no longer being
saved again all right now let's look at
see looks like a discussion question
here here's the two scenarios all right
the first one was again consumers save
the full proceeds of the tax cut the
second one is consumers saved 1/4 of tax
cut and spend the other 3/4 questions
are we
of these two scenarios do you think is
more realistic why is this an important
question now if you have trouble
understanding the first question you can
rephrase it in terms of that in a
different way that perhaps you might be
easier for you to grasp for example you
could rephrase the first part like
suppose the tax cut causes your annual
take-home pay to rise from $40,000 to
$42,000 taxes are lower you're getting
two thousand more dollars a year what
would you do with that extra two
thousand okay would you save all of it
but would you spend at least part of it
think about that that tells you which
one of these is much more likely in this
light most of you would agree that the
most realistic scenario involves
consumer spending at least part of the
proceeds at the tax cut you may be
getting something they need getting
something they won't write the answer to
the first question is whether a tax cut
reduces investment so this isn't a this
is important because a fallen investment
will cause in the long run a fall on the
standard of living because we're not
investing or not we're not investing
towards production and growth which
we've established in the last chapter
would really increase the quality of
life okay now the bigger point in in all
of this is that while tax cuts seem
appealing nobody likes paying taxes
after all you know I mean it's you know
yeah get rid of taxes you know I'm a big
proponent of that but they are not
without cost later in the chapter we
will see how a tax cut causes investment
to fall in a closed economy now this is
gonna lend itself to what you're gonna
find out the reason why that happens is
that interest rates raise but I think
about that thing if you get a little bit
of a tax refund or you get some let's
say the tax refund due to a direct tax
cut you get some money back you saving
all that we know the answer to that
you're not necessarily saving all that
in fact we probably not saving most of
it so that second example where
consumers save one-fourth and spend
three-fourths is probably be much more
likely scenario now let's move on let's
talk about the meaning of saving and
investment private ease private saving
is the income remaining after households
pay their taxes and pay for consumption
okay examples of what households do with
saving with their savings what do they
do with it all right it's just one thing
yeah I'm just gonna stash in a bank no
what do you actually do with it well you
can buy corporate bonds or equities okay
invest in the market you can purchase a
certificate of deposit at a bank it's
usually a real safe investment does it
have a whole lot of return but you know
it's good for a nice little cushion if
you need it you can buy shares of a
mutual fund okay you can invest it or
you could let it accumulate in a saving
or checking account maybe like an
emergency fund something like that
now investment is the purchase of new
capital think about this when we're
talking about last chapter talking about
buying new physical capital okay
examples of investments like General
Motors spends 250 million to build a new
factory in Flint Michigan you buy $5,000
worth of computer equipment for your
business right your parents spend 300
thousand dollars to have a new house bit
built all those things are investment
their purchase of new capital now
remember in economics this isn't finance
in economics investment is not the
purchase of stocks and bonds a lot of
people here investment 80k is just
stocks and bonds it's not in economics
when we can have an investment in terms
of new capital
we can certainly invest in stocks and
bonds mutual funds but what we're
looking at here is the purchase of new
capital now in principle you should
already know the meaning of investment
which was introduced in measuring
national income chapter however many of
you continue may continue to think of an
investment as a purchase of stocks bonds
and other assets that's just kind of
what you've been told over the years at
this point in Chapter though a review of
saving and investment is especially
worthwhile because the next topic is the
loanable funds model within the closed
economy in this model saving is the
supply of funds and investment is the
demand so again saving is the supply
brings funds into the market and people
who want to make investments are the
demanders all right there's a connection
between economic between the economics
definition of investment in the common
place uses of the term like stocks bonds
etc well lay people think of as a
financial investment which is the
purchase of stocks bonds etc is what
finite finances investment of physical
capital okay so when you buy a stock
that company uses that money you bought
to buy things like physical
for example General Motors may sell 300
million worth of bonds debted 'no stu
raise funds it needs to pay for a new
factory in Flint Michigan so they are
linked in this case people buying the
bonds are doing an investment in the
layperson sense of the term you know
buying stocks and bonds etc and GM is
using their funds to pay for the
physical investment to buy the new
factory ok so they are linked they are
linked but we're just kind of cutting
through it and saying investment is the
purchase of new capital in economic
terms all right we're taking out the
middleman here now the market for
loanable funds a supply and demand model
of a financial system ok again we're
gonna set up the market for loanable
funds it's a supply demand model of the
financial system helps us understand how
the financial system coordinates saving
and investment again saving would be the
suppliers investment will be the
demanders and how government policies
and other factors affect saving
investment in the interest rate my
apologies lost my spot here
here we go now let's assume there's only
one financial market all savers deposit
they're saving in this market all
borrowers take their loans out of this
one market we're gonna simplify here for
introductory turns to make things a
little easier for you to understand the
market for loanable funds there's one
interest rate which is both the save
returned to saving it's what the savers
earn and the cost of blong it's the
price that people pay to get a loan it's
the price that P it's the price that
people get to save and invest we know
those things would be slightly different
in the real world but in defense of this
assumption of just one financial market
we're using this model to study the
aggregate financial system it's mean the
overall financial system it's fine to
assume there's only one type of asset as
long is we don't need to know how
households divide their financial wealth
into various types of assets we're just
assuming they're all in one big pot okay
perhaps this analogy will help suppose
you want to know how a fall and consumer
income effects the automobile market
reasonable question you could draw a
supply and demand model for auto for
automobiles in which there'd be a demand
curve would would shift leftward they
would shift in there'd be the leftward
shift of the demand curve causing the
price and quantity fall got less money
for less cars your demand goes down of
course this model ignores the fact that
there are lots of different types of
vehicles but that isn't relevant to the
issue at hand so we really simplify
we're gonna simplify from day one as
soon as we drew a supply and demand
model now we're just drawing a supply
and demand model for the market of
loanable funds okay now the supply of
honourable funds comes from saving
households with extra income can learn
it out and earn interest they can put in
the bank they can invest it in different
things and earn interest and earn a pay
back on it all right now public saving
if positive we have surplus adds to the
national saving and this supply of
loanable funds if negative it reduces
the national saving and the supply of
loanable funds okay so for running the
deficit it cuts not only into what the
government has but it cuts into what the
market has now let's put it on the graph
here's the slope of the supply curve an
increase in the interest rate makes
saving more attractive
again you're getting a higher price to
supply money to the loanable funds
market okay a higher price if you're a
supplier you want to supply more okay
same thing here's just here's the price
the interest rate here's the amount of
loanable funds the quantity of funds
available at a lower interest rate
people want to supply this amount at a
higher interest rate guess what it goes
up they want to supply this amount all
right nothing's changed here from our
previous models just talking about money
and interest rates and loans now the
demand for loanable funds comes from
investment ok firms borrow the funds
they need to pay for new equipment
factories etc households borrow the
funds they need to purchase for example
new houses cars things like that ok so
there's a demand you have a demand for
investment as a firm owner you have a
demand for investment okay you need
investment you're building to buy new
equipment if you're a business now let's
look at the slope of the demand curve
they fall in the interest rate reduces
the cost of borrowing which increases
the quantity of loanable funds demanded
okay here's your price again your
interest rate that's just the price you
have to pay to borrow funds when it's
high you want less funds when it goes
down you want more funds just like when
price decreases quantity demanded
increases same thing we're just talking
about interest rates as prices and
loanable funds is quantity same demand
schedule here alright where are these
two crazy kids get together we know it's
equal erbium the interest rate adjust to
to equate supply and demand finds
equilibrium in this example it finds it
at 5% where supply crosses demand demand
across the supply and loanable funds in
this markets sixty billion dollars the
equilibrium quantity of loanable funds
equals the equilibrium investment and
equilibrium saving disequilibrium here's
where supply and demand gets together
now due to space constraints constraints
this slide uses this LF over here which
stands for loanable funds and eqm which
is equilibrium so don't let that confuse
you so the equilibrium quantity loanable
funds equals the equilibrium investment
and
Karima savings it's just where these
crazy kids get together all right
if the interest rate were lower than the
equilibrium level the demand for funds
would exceed supply causing the interest
rate to rise okay if it was lower
okay demand would be over here supply
would be right here they're gonna have
that invisible hand gonna push things
towards the equilibrium and the rise I
rise in the rate would make borrowing
more costly that's to reduce the demand
for funds so it wouldn't be able to hear
any more as we get the equilibrium moves
right here okay and then suppliers are
willing to supply more to equilibrium
than they were say if it was down here
if the interest rate was down here so
that would encourage households to save
more because it's higher interest rate
which would increase the supply of funds
this process will occur until
equilibrium is achieved and invisible
hand pushes things towards equilibrium
if it's all the same reasons why we
cover in Chapter four and every chapter
since then if the interest rate were
higher than equilibrium if it were up
here there will be a surplus of funds
because they're getting a high price to
supply funds that you've saved say
supplied B over here
demand will be over here it's a higher
price to borrow a higher price to save
same reason why you'd have a surplus and
you'd have a shortage if it was down
here all right
the interest rate would fall to restore
equilibrium again invisible hands gonna
push this to equilibrium and the real
world the adjustment of equilibrium
financial markets extremely rapid
changing all the time but shoot up can
shoot down here of late interest rates
have been kind of bottom doubt
everybody's anticipating an increase
okay we'll see they go up they go down
now let's take a look at a couple
policies first one is saving incentives
all right
tax incentives for saving increase the
supply of loanable funds for some reason
there's some sort of incentive offered
to increase savings this reduces the
equilibrium interest rating increases
the equilibrium quantity of loanable
funds so there's more funds to be had on
the market we go from sixty billion to
70 billion here even though interest
rates did decrease there's an implicit
assumption in this analysis that overall
tax revenues remain unchanged in spite
of tax incentives taken literally we
would have to assume that other tab
they're raised to exactly offset the
loss in revenue from the saving
incentives without a simplicity some
assumption total tax revenues would fall
causing causing saving to fall and
shifting the supply curve left word
which would mitigate the effects shown
here basically you know supply would
stay the same in that situation you may
have that may or may not make sense to
you but the important thing to remember
here is again just like the reason when
we have a supply of loanable funds we
have a demand for loanable funds and we
know that the program price changes
that's gonna affect supply and demand
when their shifts in supply that's gonna
affect interest rates and prices these
things can shift they can shift just
like they did when we were talking about
products and you know shift just the
same way supply and demand works the
exact same way you just need to know
that prices is equivalent to your
interest rate and your loanable funds is
your quantity okay let's look at the
second policy investment incentives so
there's an investment - or there's an
incentive to invest more you people buy
more build more factories that's
everything so an investment tax credit
so you get some credit back into your
taxes you make it less expensive for
people to build things like new
factories create jobs that type of stuff
investment tax credit increases the
demand for loanable funds which raises
the equilibrium interest rate and
increases the equilibrium quantity for
loanable funds now as with policy 1 we
are assuming the tax credit does not
significantly reduce the overall amount
of taxes if total taxes fell then supply
curve would shift in addition to the
demand curve however our intention here
is to focus solely on the demand shift
so we're looking here just one shift
just like we're looking here with a
supply shift we're looking here with a
demand shift just to know those things
shift an interest rate is your
equivalent of price of borrowing or
saving and loanable funds is the
quantity of the thing we're looking at
here no let's look at a scenario with
budget deficits because I don't know
it's pretty realistic use the loanable
funds model to analyze the effects of a
government budget deficit we can draw a
diagram showing the initial equilibrium
we can determine which curves shift when
the Gov
runs a budget deficit we can draw a new
curve on the diagram and find out what
happens to equilibrium values and
interest rate and investment now now
that I've shown you the nelsons policies
one and two this exercise asks you to
take a look at a third policy which is a
budget deficit now a budget deficit
reduces national saving and the supply
of loanable funds which increases the
equilibrium interest rate and decreases
the equilibrium quantity of loanable
funds and investment okay so long story
short supply shifts and where interest
rates go up and loanable funds go down
now some may ask why the budget deficit
shifts the supply curve rather than
demand curve after all governments
finance their deficit by borrowing the
reason is that is that we have defined
supply of loanable funds as a flow of
resources available to fund private
investment the budget deficit reduces
this supply of resources now in the real
world we sometimes see increases in
government budget deficits that are not
accompanied by dollar for dollar
decreases investment as this analysis on
the slide would would predict keep in
mind however that analysis here is for a
closed economy model alright we're not
we're not considering an international
model here we're not considering
international trade net exports that
type of thing
in an open economy firms can finance
investment by borrowing from abroad so
they can borrow from other countries in
the they can borrow from abroad in the
face of a decrease in domestic supply of
loanable funds so this decrease from
here to here can be made up for by say
borrowing from China or borne from
another country all right
this of course does not mean that the
budget deficits are okay in an open
economy but the extra indebtedness
requires service such as an interest
rate or dividend payments which reduces
the amount of income remaining for the
residents of the country in other words
if you borrow a lot to get from get from
here to here okay you're gonna owe
somebody else something and that money's
gonna be leaving the economy which is
not always a good thing
I'm trying to think of a scenario what
it's not a bad thing my money leaving
the economy's money that can be loaned
out spent or used on investment to
create production and growth so you
don't want to have a lot of indebtedness
okay somebody needs to tell Washington
that now budget deficits crowding out in
the long run growth are now in our
analysis that there's been an increase
in the budget deficit which causes a
fall in investment okay when you don't
have as much investment to or you don't
have as much money to invest there's
gonna be a fallen investment which is
gonna hurt your productivity and growth
in the long run the government borrows
to finance its deficit leaving less
funds available for investments so it's
kind of that kind of piggybacks all
right this is called crowding out now
recall from the preceding chapter
investment isn't is important for
long-run economic growth hence the
budget deficit reduces the economy's
growth rate and the future standard of
living now
while the budget looking at the last
point while the budget deficit does not
affect a steady state growth of new in
growth theory it affects the economy's
growth rate temporarily long enough to
reduce the steady state level of income
per capita so people have less money
they have less money save you have less
money to invest and you have less money
to grow them and and some growth models
budget deficits can affect the steady
state growth rate all right now I'm
saying if you've got less money coming
in and you got going out you got less
money to invest if you get less morning
to invest you're gonna get less return
and with less money to invest in
economy's going to struggle to grow and
develop
no the US government debt all right the
government finances deficits by
borrowing or selling government bonds
they're persistent deficits lead to a
rising government debt the ratio of
government debt to GDP is a useful
measure that G of the government's
indebtedness relative to its ability to
raise tax revenue historically the debt
to GDP ratio usually Rises during
wartime okay so you have to take home
more spending during wartime and falls
during peacetime
this was until the early 1980s let's
take a look at it you can see here
obviously government debt went up
greatly during wars revolutionary civil
war one and then BOOM big spike World
War two okay and then we look as
recently as around 2010 we had the
financial crisis now note in recent
years the debt Virginia GNP our gross
national product or income is higher
than any other time besides World War
two just across here I mean there's a
lot going on here in terms of real
dollars big spike in W and World War two
and we're heading for a big spike as of
in 2010 I can say that this numbers
somewhere probably ran around here so
from the beginning of his long time
series that we're looking at until about
1980 the data shown shows a clear
pattern a debt to GDP ratio that jumps
during more time and comes back during
peacetime
also the Great Depression caused
revenues to plummet and led to a rise in
debt ratio in the 1930s back here see it
creeping up before or - there are two
reasons why economists believe it's
appropriate to allow debt ratio to climb
during Wars first it allows the
government to keep tax rates smooth over
time certainly looks huge increases wars
are expensive and financing them with
tax increases will be disruptive to the
economy and would cause substantial
reduction economic efficiencies like wow
here's your big bill now now go out
there and buy stuff yeah right second
the depth debt financed shifts part of
the cost of war to future generations
okay other people are paying for
whatever we're doing now this is this is
appropriate one could argue because
future generations benefit from when the
government gets to war to defend the
nation against foreign aggressors the
aggressors so the pattern is visible
throughout most of history which breaks
down only you know but it breaks down
around 1980 when the debt ratio started
climbing despite the lack of a major war
okay looking somewhere in here I think
climb without a war this was due to the
Reagan tax cuts and the growth of the
federal and timon entitlement outlays
during the 1980s now from 1992 to 2000
longest expansion on record plus a
strong stock market stock that stock
market from 1995 to about 2000 let's say
led to a surge in revenues we were kind
of riding high the first budget
surpluses in many years and declining
debt and GDP ratio now from 2000 to 2005
the ratio started to climb again due to
the Bush tax cuts and and also the 2001
recession and then the wars in
Afghanistan and Iraq in the war on
terror in general the ratio shoots up
dramatically from 2008 2010 due to the
financial crisis and the recession so
that's why that you start seeing it come
up without a war here now in conclusion
like many other markets financial
markets are governed by the folk by the
forces of supply and demand alright one
of the 10 principles in Chapter one was
markets are usually a good way to
organize economic economic activity
financial markets help allocate that
economy scarce resources to the most
efficient uses financial markets also
linked the present to the future they
enable savers to convert current income
into future purchasing power think about
what you invest eventually you want to
take that back out when you retire
that's your futures or future purchasing
power and borrowers now can acquire the
capital to produce goods and services
that you can use in the future as well
so it's it's really pretty cool it's
linked up this slide may oversimplify
the issue but it really is supply and
demand you just need to know the
language around it to be able to
navigate it so in summary the US
financial system is made of many types
of financial institutions like stock and
bond markets banks and mutual funds
national saving equals private saving
plus public saving okay pretty simple in
a closed economy national saving equals
investment the financial system makes
this happen the supply of loanable funds
comes from saving the demand for funds
comes from investment the interest rate
adjusts to balance the supply and demand
of loanable funds to the market now a
government budget deficit is is negative
public saving so it reduces national
saving and
apply funds available to finance
investments if you're constantly running
deficits you can have less ability to
finance investment within your own
economy so you got the bar from other
areas when a budget deficit crowds out
investment it doesn't allow investment
to happen it reduces the growth and
productivity the growth of productivity
and GDP and we all know from the
productivity chapter what a lower growth
rate in GDP can have an effect on GDP
per capita incomes per capita things
like health care how healthy people are
things like investment in schooling and
once those things start to go the
economy starts to really bottom out it
could potentially you know in the u.s.
we're talking about a slow stretch we're
not talking about people like in Mali
where they're not able to eat or find
clean water however if you don't have a
means to have savers and investment
folks to come together in a market
format to freely come together it's
really gonna affect how much investment
you can have which affects how
productive you can be which is going to
affect how much you can grow so this
wraps up a really jam-packed chapter
it's not overly long it just has a lot
of material in it that you guys are not
going to be very familiar with so the
lecture is important obviously you know
this video lecturing live lecture if
you're a part of that and then also the
reading the reading is gonna be huge for
this chapter okay work through those
examples they're not overly difficult
the maths not are really difficult but
you have to know what you're doing to be
able to do well on the exam and to more
importantly graphs the concepts of
saving investment the financial system
feel free to let me know if you have any
questions email call come by the office
be happy to talk to you thank you