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Chapter 13: Saving, Investment, and the Financial System
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Chapter 13: Saving, Investment, and the Financial System

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  • 1. Chapter 13 Saving, Investment, and the Financial System
  • 2. Outline
    • Coordination of savings and investment by the economy
    • Working of the financial system and its constitution
    • Develop a model of supply and demand for funds
    • Impact of government policies on interest rate
  • 3. Financial System in Canada
    • Financial system is a group of institutions in the economy that help to match one person’s saving with another person’s investment.
    • It is made up of a number of financial institutions. Broadly of two types
      • Financial markets
      • Financial Intermediaries
  • 4. Financial Markets
    • Financial markets are institutions through which savers can directly provide funds to borrowers
      • The bond market
      • The stock market
    • The bond is a certificate of indebtedness and has two important characteristics
      • Term of the bond (date of maturity)
      • Credit risk- probability of default by the borrower
      • Tax assessment: Interest rate on most bonds is subject to a tax
  • 5. Financial Markets
    • The stock market: Stock is a claim to partial ownership of firm and issue of stock is done through sale of shares to the public
    • Equity finance versus debt finance
    • The prices at which shares trade on stock exchange are determined by the supply and demand for the stock in the company
    • Equity premium- bonus paid by the market to shareholders
    • Stock index is the average of a group of stock prices
  • 6. Financial Intermediaries
    • Financial intermediaries are financial institutions through which savers ca indirectly provide funds to borrowers
      • Banks
      • Mutual funds
    • Banks help create a special asset (cheques against deposits) that functions as a medium of exchange
  • 7. Financial Intermediaries
    • Mutual fund is an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds
    • The shareholder of the mutual fund accepts the risks and returns associated with the mutual fund
      • Helps small savers to diversify risk
  • 8. Reading the Newspaper’s stock tables
  • 9. Reading an online Quote
  • 10. S and I in the National Income Accounts
    • S and I are important determinants of LR growth in GDP and standards of living of a nation
    • Recall: Y = C + I + G + NX
    • Assume a closed economy
    • There are two components to national saving:
      • Public saving
      • Private saving
  • 11. S and I in the National Income Accounts
    • For the economy as a whole, saving must be equal to investment
    • The concept and calculation of Present Value
  • 12. The Market For Loanable Funds
    • Financial markets co-ordinate the economy’s saving and investment in the Loanable Funds Market
    • Saving represents the supply of loanable funds
    • Investment represents demand for loanable funds
    • The supply and demand for loanable funds depends on the real interest rate
    • Equilibrium determines the real interest rate in the economy
  • 13. Government Policy and Economy’s Saving and Investment
    • Policies that influence the loanable funds market:
      • Tax incentives and Saving
        • Tax incentives that encourage savings would result in lower interest rates and greater investment
      • Tax credits and Investment
        • Tax credits that encourage investment would result in higher interest rates and greater saving
      • Government Budget Deficits/Surpluses
  • 14. Government Policy and Economy’s Saving and Investment
    • Government Budget Deficits
      • Impacts adversely on national saving
      • Government borrowing crowds out private investment
      • Budget deficits and vicious circle
      • Budget surplus and virtuous circle
    • Accumulation of government debt in Canada
      • Policies undertaken by the federal and provincial governments
  • 15.  
  • 16. FEDERAL GOVT: BUDGET SURPLUS and BUDGET DEFICIT
  • 17. PROVINCIAL GOVT: BUDGET SURPLUS and BUDGET DEFICIT
  • 18. Savings and Investment in Canada as % of GDP 1961-2001

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