Savings The higher the saving rate, the higher the GDP and standard of living

( In order to invest in productive capital, businesses need to borrow from other peoples savings )
( Savings of a country is called National Savings ( NS )
( Private Savings + Government Savings = National Savings (NS)

More More savings means more investments

Investment ( savings and private investment savings are always equal )
( Firms can only invest what is left of private savings after government uses some to pay deficit )

Government Savings ( Sg) is called Budget Balance

Budget Balance (BB) = Sg = Tax Revenue (T) - Government Spending Transfers ( TR )
( Private Savings ( Sp ) = Disposable Income - Consumption )
( Disposable Income (Yd) = Income (GDP) + Transfers - Taxes )

Example If we make $1000(GDP), and get $100 in Transfers(pensions) and pay $500 in taxes, consumption of
500, what is Yd)
( 1000 + 100 - 500 = 600 )
( Private Savings = GDP + TR - T - C ) → 600 - 500 = 100 )

Closed Private Investment = National Saving ( A closed economy has no international trade ) ( NS = I )
Economy ( GDP = C + I + G ) ( S Private = GDP + TR - T - C ) ( S Government = T - G - TR ) ( NS = Sp + Sg )

Example ( GDP = 1000 ) ( Taxes = 50 ) ( Government Spending = 100 ) ( Consumption = 850 )

( Investment Spending → ( GDP - C - G → 1000 - 850 - 100 = 50 )
( Disposable Income = ( GDP + TR - Taxes - C ) → 1000 - 50 - 850 = 100 )
( Budget Balance = ( Tax - G ) → 50 - 100 = -50, government owes more money )
( National Savings = Sp + Sg ) → 100 + (-50) = 50
( I is 50 million and NS is 50 million, so I is 5 and the identity is proven )

Open Economy ( Private Investment = National Saving / Capital Inflow )

( Our investment can exceed savings, but we have to borrow from overseas ) (Borrowing is capital inflow)
( Capital Inflow (KI ) is the difference between foreign money that must be imported into our country (IM)
and the money we lend to other countries (E)

If IM > E or KI > 0, ( we are investing more than our savings. So we have to borrow from foreign
( KI is positive and NX is negative )

If IM < E or KI < 0 ( we are investing less than our savings, we cn loan money from foreign
( KI is negative and nX is positive )

KI (IM - E ) is the opposite of NX (E - IM ) ( Remember composition of GDP )

GDP = C + I + G + NX → ( GDP - C - G - NX = Investment )

Since NS = GDP - G - C → NS - NX = I
( Then NS - NX = I or NS - I = NX )
( If we export more than we important, we will have money available to loan out to countries )
( what we don’t loan, wil be leftover for investment )
( NS - NX = I ) ( NS is what we save ) ( NX is what we loan out ) ( I is what we are investing )
Save is Bigger NS - I = NX ( NS is what we save ) ( NX is we can load funds to countries ) ( I is domestic investment )
than Invest
Example: National savings is 20 Billion and domestic investment is 15 Billion ) ( NX = 20 - 15 = 5 Billion )

Ex: GDP is 500, C is 100, G is 50, exports are 50, imports are 100, taxes are 100
Sp = GDP _ TR + T - C → 500 - 100 - 100 = 300
Sg = T - TR - G → 100 - 0 - 50 = 50
NS = Sp + Sg = 300 + 50 = 350
Investment = GDP - C - G - NX → 500 - 100 - 50 - ( 50 - 100 ) → 500 - 100 - 50 + 50 = 400 )
( If I = 400 and NS = 350, you need to borrow $50 so KI, capital inflow would be 50 )

Import more We will need to borrow money from overseas, here the NX will be negative, replace with KI
than Export ( NS + KI = I or I - NS = KI ) ( Borrowing is capital inflow )

( NS + KI = I ) ( NS is what we save ) ( KI is what we borrow ) ( I is what we invest domestically )

( I - NS = KI ) ( I is what we invest ) ( NS is what we save ) ( KI is what we need to borrow )

EX: We have 20 Billion in national savings, we invest 25 Billion

( I - NS = KI → 25 - 20 = 5 Billion is the capital inflow (KI )

Ex: We have 100 Billion in Private Savings, -50 billion in government savings, 10 billion of capital inflow
( NS = Sp + Sg → 100 = (-50 ) = 50 billion ) ( NS + KI = I → 50 + 10 = 60 Billion )

Now S Private + S Government + ( IM - X )

Investment ( GDP = 1000 ) ( Taxes - 100 ) ( Government - 50 ) ( C = 700 ) ( Exports are 50 and Imports are 100 )
Investment = GDP - C - G - NX → 100 - 70 - 50 - (-50) → 100 - 70 - 50 + 50 = 300 )
S private = GDP + TR - C - T → 1000 + 0 - 700 - 100 = 200 )
S government - ( Tax - G ) - TR → 100 - 50 = 50 )
Capital Inflow(KI) → IM - X → 100 - 50 = 50
National Savings = Sp + Sg → 200 + 50 = 250 ( I = NS doesn’t exist in open economy )
( Check I = NS + KI → 250 + 50 = 300 )

Example ( GDP = 1000 ) ( G = 100 ) ( C = 850 ) ( X = 100 ) ( T = 50 ) ( IM = 125 )

Investment = GDP - C - G - NX 1000 - 850 - 100 - ( 100 - 125 ) → 1000 - 850 - 100 + 25 = 75
Private = GDP + TR - C - T → 1000 + 0 - 850 - 50 = 100
Budget Balance = T - TR - G → 50 - 0 - 100 = -50
Capital Inflow = IM - X = 125 - 100 = 25
Identity Proof = I = NS + KI → ( 100 - 50 ) → 50 + 25 = 75

Interest Rates Real = increase in purchasing power on investment ( the actual interest you make in savings )

Nominal = nominal increase earned on investment, which covers any change in purchasing power
( the interest rate that banks to quote you ) ( Real Interest Rate + Inflation Rate )
( Inflation is 2%, you want to earn 5%, real returns on an investment is ( 5% + 2% = 7% )
( Interest rate is like the loanable funds, so rate affects Qd and supplied of loanable funds

Rate of Return ( Revenue from Project - Cost of Project / Cost of Project ) 100
( Businesses will want a loan as long as the Rate of Return > or = the interest rate )
( Be sure the project earns more than just saving your money ) ( Q of LF is on X, Interest rate is on P )
( Demand from firms investment, Supply is national savings ( Sp and Sg )
Equilibrium ( 3% is the rate at equilibrium ) ( Q LF 1 is at equilibrium ) ( Rate of return is going to be higher than 3% )(
( Borrowing and rate of returns is higher than 3%, below is loaning and lending at 3% or less )
( In Equilibrium = Private Savings + Government Savings = Supply = Investment ( Demand )
( Supply of loanable funds comes from private savings and government savings )
( Demand for Loanable Funds comes from private firms for investment )

( In the interest rate of 4%, demand moves to new Qd, Supply moves to new Qd )
( QD = 300 ) ( QS = 550 ) ( Surplus of 250, one wants to borrow
( decreasing rates to go back to equilibrium will raise chances of borrowing )

Example Demand = 0.07 - 0.001Q

R = 0.07 - 0.001(0) → 0.07
0 = 0.07 - 0.001Q → 0.07 / 0.001 = 70 ( R = 7% ) ( Q = 70 )

Supply = 0.002Q
R = 0.002(0) → 0 ( R = 0 )

Equilibrium
0.07 - 0.001Q = 0.002Q → 0.07 = 0.003Q → Q = 23.33
R = ( 0.07 - 0.001(23.33) → → 0.07 - 0.02333 = 0.04667 ) ( 0.002(23.33) = 0.047 )
( 4.7% and 23.33 is equilibrium ) ( Projected Revenue = 100,500 ) ( Estimated Cost = 93,000 )
ROR = ( Revenue - Cost / Cost ) 100 ) → ( 100,500 - 93,000 / 93,000 ) 100 = 8.06%

Financing Taxation: Higher income taxes will decrease or crowd out consumption (C), which will partially cancel out
the effect of the increase in Government spending (G)

2. Selling bonds to the public: The government will sell bonds to borrow money.
( increased rate of return on bonds will make interest rates higher )
( higher rates decrease or crowd out investments )

Crowding Out ( a situation in which the government spending decreases private investment
( The larger the government deficit the less investment there will be by firms because there is an increase
in the interest rate ( money is more expensive to borrow )
( Example is governments have to borrow money from our private savings to pay off their
debts, leaving less money for firm investment → only good if invested in infrastructure

Shifting Curves ( Demand is for firms. Private investment )

( Change in future profitability of investment, technology industry bust in 2000 shift demand down )
( Change in government policies towards investment ) ( Bigger tax breaks for investment shift demand up

( Supply is households and government )

( Change in government debt ) ( government gets in debt, so borrow funds, supply decreases )
( Change in people’s attitudes towards savings ( bigger tax breaks for savings shafts supply up )

Policies for 1: Provide good institutional structure (good transportation systems, reliable financial systems)
Promoting ( Laws, justice system ) ( Minimal “red tape” ) ( Don’t support dying industries )
Growth 2: Invest in public goods ( healthcare and education ). mitigations against natural disasters
3. Incentives for personal saving and international investment spending ( EG. tax deductions )
( With tax deductions, interest rates decreases, private savings increase and shift to the right, for private
investments, the demand also increases ) ( Quantity for LF increases )
Crowding Out Government Deficit ( SG is negative ) ( Red tape is barriers to entry )
( Quantity for LF will decrease, interest rates will increase, savings(SG.SP) supply decreases, shifts left,
Private investment decreases )

Example Demand = 0.15 - 0.001 → ( R = 0.15 ) ( Q = 0.15 / 0.001 = 150 )

Supply = 0.001Q → ( R = 0 )
Equilibrium = 0.15 - 0.001Q = 0.001Q → Q LF = 75 ) ( R = 0.001(75) = 7.5 )

Profitable investment increasing demand to r = 0.20 - 0.001Q → ( R = 0.20 ) ( Q = 0.20 /

0.001 = 200 )
New Interest rate = 0.20 - 0.001Q = 0.001Q → ( Q LF = 100 ) ( R = 0.001(100) = 10 )
Increase in Quantity Saved = 100 - 75 = 25 )
New Private Investment = New Equilibrium Q2 is the new investment of 100 )

Example If government has more deficit, SP goes up,