ModuleSaving,Investment, andthe Financial System

KRUGMAN'SMACROECONOMICS for AP*

22

Margaret Ray and David Anderson

What you will learnWhat you will learn

in thisin this ModuleModule::

• The relationship between savings and investment spending

• The purpose of the four principal types of financial assets: stocks, bonds, loans and bank deposits

• How financial intermediaries help investors achieve diversification

• Physical Capital

• The Source of Physical Capital

Matching up Savings andMatching up Savings andInvestment SpendingInvestment Spending

The Savings-Investment Spending IdentityThe Savings-Investment Spending Identity

• Assume a simple economy

• Total Income = Total Spending

• Total Income = Consumption + Savings

• Total Spending = Consumption+ Investment

• Consumption + Savings = Consumption + Investment .: Savings = Investment

The Savings-Investment Spending IdentityThe Savings-Investment Spending Identity

• Now, more complexity

•Budget Surplus

•Budget Deficit

•Budget Balance

•National Savings v. Private Savings

•Capital inflow

• Wealth

• Financial Asset

• Physical Asset

• Liability

The Financial SystemThe Financial System

Three Tasks of a Financial SystemThree Tasks of a Financial System

• Reducing Transaction Costs

• Reducing Risk

• Financial Risk

• Diversification

• Providing Liquidity

• Liquid

• Illiquid

Types of Financial AssetsTypes of Financial Assets

• Loans

• Bonds

• Default

• Loan-backed Securities (Collateralized Debt Obligation - CDO)

• Stocks

Financial IntermediariesFinancial Intermediaries

• Mutual Funds

• Pension Funds

• Life Insurance Companies

• Banks

• Bank deposit

• Fractional reserve banking