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?
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
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
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
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.
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.
