This document provides an overview of key concepts related to saving, investment, and financial markets from an economics textbook. It defines important terms like investment, saving, and different types of financial institutions and markets. It also uses supply and demand diagrams to illustrate how interest rates are determined in the market for loanable funds and how government policies can impact this market through incentives for saving and investment or changes in budget deficits. Historical data on Japan's trade balance, current account, and government debt are also presented.

1. 1
Principles of Economics
Chapter26
Saving,Investment,and the Financial System

2. 2
What we learned
from previous chapter
• Chapter23 :Components of GDP
• Chapter24 :Inflation rate CPI
• Chapter25 :A country's standard living depends on its ability
to produce goods and service and
and productivity depends on
– physical capital
– human capital
– natural resources
– technological knowledge

3. 3
How do we match one person's saving
with another person's investment?

4. 4
Chapter26 Index
1. Financial Institution
2. Saving and Investment in the National Income
Accounts
3. The Market for loanable funds
(building a model of financial markets)

5. 5
Ten Principles of Economics
Ⅰ.How People Make Decisions.
1:People Face Trade-offs.
2:The Cost of Something Is What You Give Up to Get It.
3:Rational People Think at the Margin.
4:People Respond to Incentives.
Ⅱ.How People Interact.
5:Trade Can Make Everyone Better Off.
6:Markets Are Usually a Goodway to Organize Economic Activity.
7:Governments Can Sometimes Improve Market Outcomes.
Ⅲ.How the Economy as a Whole Works
8:A Country's Standard of Living Depends on its Ability to Produce Goods and Services.
9:Prices Rise When the Government Prints Too Much Money.
10:Society Faces a Short-Run Trade-off between Inflation and Umemployment.

6. 6
Financial System
Financial Systems
one person's
Saving
Another person's
Investment
the financial system moves the economy's scarce
resources from savers to borrowers

7. 7
Financial Markets
and Financial Intermediaries
Financial Markets
Financial Intermediaries
The Bond Markets
(Debt finance)
The Stock Markets
(Equity finance)
Banks
Mutual Funds
Bond maturity
Credit Risk
Tax treatment
Owner ship
Stock exchange
Stock Index
Deposit
Loan
Medium of exchange
Access skills of
professional money
manager
diverse portfolio
stocks and bonds

8. 8
Direcrt Finance and Indirect Finance
Corporations
(Borrower)
Bank
(Indirect finance)
house holds
Investors
(Savers)
Deposit
Loan
Market
(Direct finance)
Investment
Stocks,Bonds

9. 9
Chapter26 Index
1. Financial Institution
2. Saving and Investment in the National Income
Accounts
3. The Market for loanable funds
(building a model of financial markets)

10. 10
National Saving
Y= C + I + G + NX
we assume a closed economy,so NX=0
Y =C + I + G ⇔ Y - C - G = I ⇔ S = I
S = Y - C - G
S = ( Y - T - C ) + ( T - G )
National Savings
National Savings
Private Savings
Government Savings
Y:GDP
C:Consumption
I:Investment
G:Government purchases
NX:Net Exports
S:National Savings
Financial Markets

11. 11
National Saving
asssuming open economy
Y=C+I+G+NX(EX-IM) expenditure aspect・・・①
Y=C+S+T allocation aspect・・・②
Substitute① for ②
C + I + G + EX - IM = C + S + T
S - I ＝ G - T + EX - IM
(S + T) - ( I + G) ＝ EX - IM
Private Savings
budget deficit
National savings
Trade surplus
Trade surplus

12. 12
Japan exports and Imports
(単位：億円)
Trade Balance
Exports
Imports
1996
88,140
435,088
(346,948)
1997
120,928
494,847
(373,919)
1998
158,258
488,854
(330,596)
1999
137,618
457,759
(320,141)
2000
123,759
494,912
(371,153)
2001
84,544
465,944
(381,400)
2002
115,443
494,442
(378,999)
2003
119,600
519,015
(399,415)
2004
139,112
582,459
(443,347)
2005
102,944
625,177
(522,233)
2006
94,048
715,502
(621,454)
2007
123,484
797,383
(673,899)
2008
41,383
774,329
(732,946)
2009
40,240
508,001
(467,761)
2010
79,354
638,838
(559,484)

13. 13
Japan exports and Imports
(Unit:億円)
excluding data of Dec 2011
http://www.mof.go.jp/international_policy/reference/balance_of_payments/bpnet.htm

14. 14
(単位：億円)
Current Account
Goods &Services
Income
Current Transfers
1996
71,035
22,940
58,031
(9,937)
1997
117,106
57,626
70,103
(10,619)
1998
155,521
96,220
70,711
(11,410)
1999
131,508
78,314
65,538
(12,342)
2000
129,483
74,572
65,458
(10,548)
2001
106,539
32,762
83,596
(9,818)
2002
140,324
64,727
82,477
(6,876)
2003
157,545
83,311
83,166
(8,932)
2004
186,479
102,046
93,068
(8,630)
2005
184,153
76,381
115,736
(7,966)
2006
199,124
72,555
138,921
(12,351)
2007
247,395
98,443
162,571
(13,616)
2008
165,352
20,034
158,895
(13,574)
2009
133,149
21,208
123,336
(11,395)
2010
171,603
65,136
117,706
(11,240)
2011
88,651
(28,759)
128,937
(11,527)
Japan Current account

15. 15
Japan Current account
excluding data of Dec 2011
http://www.mof.go.jp/international_policy/reference/balance_of_payments/bpnet.htm

16. 16
国際収支発展段階説
内閣府ホームページ
http://www5.cao.go.jp/keizai3/shihyo/2005/1205/681.html

17. 17
The meaning of
saving and investment
In a language of macroeconomics,
q Investment:
the purchase of new capital,such as
equipment or building.
q Buying stocks or bonds:
savings rather than investment.

18. 18
Chapter26 Index
1. Financial Institution
2. Saving and Investment in the National Income
Accounts
3. The Market for loanable funds
(building a model of financial markets)

19. 19
Supply and Demand for Loanable Funds
5%
1,200
Interest
rate
Loanable Funds
Supply
demand
q The supply of loanbel funds:
coming from national savings,including both private savings and public savings
q The demand of loanbel funds:
coming from household and firms who wish to borrow to make investment
Figure1 P565
q Interest rate:
the price of loan and adjusting to balance the supply and demand for loanables funds

20. 20
Three steps to analyzing changes in
equilibrimu from Chapter4
1. Decide wether the event shifts the supply or demand
curve(or perhaps both)
2. Decide in which direction the curve shifts
3. Use the supply-and-supply diagram to see how the shifts
changes the equilibrium price and quantity.

21. 21
Policy1:Saving Incentives
5%
1,200
Interest
rate
Loanable Funds
Supply1
demand
q 1st Step:
A change in the tax law to encourage people to save more wolud shift the supply.
q 2nd Step:
The supply would increase,and the supply curve would shift to the right.
Figure2
P567
q 3rd Step:
The increases supply reduces the interest rate from 5% to 4%.
4%
Supply2
1,500

22. 22
Policy2:Investment incentives
6%
1,200
Interest
rate
Loanable Funds
Supply
Demand1
q 1st Step:
The passage of investment tax credit to encourage firms to invest
more would shift the demand.
q 2nd Step:
The demand would increase,and the demand curve would shift to the right.
Figure3
P568
q 3rd Step:
The quantity of loanable funds demanded raise the interest rate from 5% to 6%.
5%
1,400
Demand2

23. 23
Policy3:Government budget deficits and surplus
6%
1,200
Interest
rate
Loanable Funds
Supply1
demand
q 1st Step:
A change in the government budget balance represents a change in public saving,and
in the supply of lonable funds.
q 2nd Step:
A budget deficit the supply curve for loanable funds to the left.
Figure4
P569
q 3rd Step:
The budget deficit reduces the supply of lonable funds,the interest rate rises
from 5%to 6%.
5%
Supply2
1,500
Crowding Out!!

24. 24
The history of JPN Government debt
http://www.mof.go.jp/gallery/20110308.htm

25. 25
The debt of the JPN GDP as a percentage of GDP
http://www.mof.go.jp/gallery/20110309.htm

26. 26
Conclusion
• Financial markets serve the important role of linking the
present and the future
• Those who supply loanable funds do so because they want
to convert some of their current income into future
purchasing power.
• Well-functioning financial markets are important not only for
current generations but also for future generations.