Contact Details. Section 16 Agenda. Administrative Stuff. Important to remember: Savings and Capital Formation. Review of Last Lecture - 10/23 rd

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1 ECON 1 ection 16 avings and Capital Fomation. Contact Details G: Ramon Estopina Office Hous: Thusday 1:45-3:45 PM Office: Evans estopina@haas.bekeley.edu Handouts (only sections 104 & 133) afte class in: Please ead: Read befoe downloading!. ECON 1 ection 16 Page 1 ECON 1 ection 16 Page 2 ection 16 Agenda Administative tuff (3 min). Recap Quiz (5 min) Poblem 22.2 (10 min). Poblem 22.3 (10 min). Poblem 22.9 (15 min). Re-cap (2 min). Administative tuff P#3 due today!!!! Leave them on the table. will etun them next Monday. Remembe to complete the suvey online. ECON 1 ection 16 Page 3 ECON 1 ection 16 Page 4 Review of Last Lectue - 10/23 d Chapte 22: aving: National aving, Public and Pivate saving aving as flow, wealth as stock, Changes in Wealth Why people save; impact of on savings Factos that affect ; impact of on investment and D fo savings and investment (= in closed economy) & D fo funds ( & ): shifts of and D, cowding out mpotant to emembe: National avings: aving of total economy = GDP less consumption expenditues and govenment puchases of goods and sevices. = Y C G National avings = Pivate av. + Public av. = (Y T C ) + = pivate + public (T - G) ECON 1 ection 16 Page 5 ECON 1 ection 16 Page 6

2 Recap Quiz - 1 The saving ate is equal to: 1) cuent income minus spending on cuent needs. 2) saving divided by income. 3) income minus consumption. 4) the change in saving that coesponds to a change in income. 5) saving divided by consumption. Recap Quiz - 2 Wealth can be defined as 1)anything of value that one owns. 2)the debt one owes. 3)total income plus savings. 4)assets minus liabilities. 5)income plus assets. ECON 1 ection 16 Page 7 ECON 1 ection 16 Page 8 Recap Quiz - 3 nceases in the value of existing assets ae known as 1) wealth. 2) savings. 3) capital gains. 4) capital losses. 5) income. Recap Quiz - 4 f tax collections exceed govenment spending, thee is a budget 1) shotfall. 2) deficit. 3) suplus. 4) windfall. 5) balance. ECON 1 ection 16 Page 9 ECON 1 ection 16 Page 10 Flows and tocks REMEMBER: Flow: A measue that is defined pe unit of time. tock: A measue that is defined at a point in time. Poblem 22.2 (F&B page 600) tate whethe each of the following is a stock o a flow and explain: A) The Goss Domestic Poduct. B) National avings. C) The value of the U housing stock on Jan, 1 st, 2001 D) The amount of U cuency in ciculation as of this moning. E) The govenment budget deficit F) The quantity of outstanding govenment debt on Jan. 1 st, 2001 ECON 1 ection 16 Page 11 ECON 1 ection 16 Page 12

3 Poblem 22.2 (cont d) A) The Goss Domestic Poduct. Flow. GDP epesents poduction pe unit of time, such as a yea o a quate. B) National avings. Flow. National saving is measued pe unit of time, analogous to individual saving. C) The value of the U housing stock on Jan, 1 st, 2001 tock. This value is measued at a point in time. Poblem 22.2 (Conclusion) D) The amount of U cuency in ciculation as of this moning. tock. Again, the value is measued at a point in time. E) The govenment budget deficit. Flow. The deficit is the govenment s spending less its eceipts. pending and eceipts ae measued pe unit of time, such as a yea o quate. F) The quantity of outstanding govenment debt on Jan. 1 st, 2001 tock. The quantity of govenment debt outstanding is measued at a point in time. ECON 1 ection 16 Page 13 ECON 1 ection 16 Page 14 Poblem 22.3 (F&B page 600) Remembe: Why Do People ave? Life-cycle saving: fo long-tem objectives Retiement College tuition Buying home o ca Pecautionay saving: fo unexpected setbacks Loss of job Medical emegency Bequest saving: to leave an inheitance Poblem 22.3 (cont d) Ellie and Vince ae a maied couple, both with college degees and jobs. How would you expect each of the following events to affect the amount they save each month? A) Ellie leans she is pegnant. ECON 1 ection 16 Page 15 ECON 1 ection 16 Page 16 Poblem 22.3 (cont d) Fo life-cycle easons (anticipation of futue child-cae expenses, tuitions), Ellie and Vince will pobably incease thei cuent saving. Thee is also the possibility that in the futue one o both paents may wok less in ode to be at home; to pepae fo the possibility of educed income in the futue the couple should save moe today. B) Vince eads in the pape about posible layoffs in his industy. Vince s isk of layoff has inceased, so the couple should incease thei saving fo pecautionay easons. Poblem 22.3 (cont d) C) Vince had hoped that his paents would lend him money fo a puchase of a home. Now he leans they can t affod it. Moe saving is needed to meet a life-cycle objective. D) Ellie announces that she would like to go to law school in the next few yeas. Moe saving is needed fo a life-cycle objective; as the couple faces both a eduction in thei income and tuition expenses in a few yeas, they need to save moe now. ECON 1 ection 16 Page 17 ECON 1 ection 16 Page 18

4 Poblem 22.3 (Conclusion) E) A boom in the stock maket geatly inceases the value of the couple's etiement funds. Less saving is needed to meet the life-cycle objective of etiement. F) Ellie and Vince agee that they would like to leave a substantial amount to local chaities in thei wills. Fo bequest easons, the couple should save moe. Pice P upply & Demand fo avings Remembe: n a closed economy (NX=0) Q D Quantity Real nt. Rate %, aving nvest. aving & nvestment ECON 1 ection 16 Page 19 ECON 1 ection 16 Page 20 & D fo avings (cont d) Explanation: Y=C++G+NX f NX=0, then = Y-C-G = (Y-C-T) + (T-G) O = = Pivate + Public. upply: quantity of savings that businesses, households, and govenments ae willing to supply at each value of. Demand: quantity of investmen that fims would choose and so amount they would boow at each value of. & D fo avings (Conclusion) n Financial makets: Equate and D fo savings Real inteest ate: pice of savings n equilibium the pice of savings is. f a Technological impovement: shifts ight. At any given, an incease in the maginal poduct of capital makes fims moe eage to invest. An incease in the Govm t deficit: shifts left. At any given, a decease in Public will decease (cowding out). ECON 1 ection 16 Page 21 ECON 1 ection 16 Page 22 Poblem 22.9 (F&B page 602) A) Fo each of the following scenaios, use supply and demand analysis to pedict the changes in eal inteest ate (), National avings () and investment (). A) The legislatue passes a 10% investment tax cedit. Unde this pogam, fo evey $100 that a fim spends on new capital equipment, it eceives an exta $10 in tax efunds fom the govenment. (%) Poblem 22.9 (cont d) A) The legislatue passes a 10% investment tax cedit.,, / The investment tax cedit effectively lowes the pice of new capital goods to the fim by 10%. Fims willingness to invest inceases, aising the demand fo saving (). The eal inteest ate, investment, and national saving ise as the demand fo saving () cuve shifts to the ight. ECON 1 ection 16 Page 23 ECON 1 ection 16 Page 24

5 (%) Poblem 22.9 (cont d) B) A eduction in militay spending moves the govm t budget fom deficit into suplus.,, / nceased public saving aises national saving. The supply of saving () cuve shifts ight. The eal inteest ate falls, national saving and investment ise. (%) Poblem 22.9 (cont d) C) A new geneation of compute-contolled machines becomes available. This machines poduce goods much moe quickly and with fewe defects.,, / nceased poductivity of new capital goods makes investment moe pofitable. The demand fo saving () cuve shifts to the ight. The eal inteest ate, investment, and national saving ise as the demand fo saving () cuve shifts to the ight. ECON 1 ection 16 Page 25 ECON 1 ection 16 Page 26 Poblem 22.9 (cont d) D) The govm t aises its tax in copoate pofits. Othe tax changes ae made such that the govmt deficit emains unchanged. The inceased tax on copoate pofits educes the afte-tax etun to capital investments (a geate shae of the income eaned by capital goes to the govenment). Fims become less willing to invest, so that the demand fo saving () shifts leftwad. Public saving is unchanged by assumption, so the supply of saving cuve () does not shift,, / The eal inteest ate, investment, and national saving all decline. (%) Poblem 22.9 (cont d) E) Concens about job secuity aise pecautionay savings. nceased pivate saving aises national saving. The supply of saving () cuve shifts ight. The eal inteest ate falls, national saving and investment ise. (%),, / ECON 1 ection 16 Page 27 ECON 1 ection 16 Page 28 (%) Poblem 22.9 (Conclusion) F) New envionmental egulations incease fims costs of opeating capital.,, / The inceased costs educe the afte-tax etun to capital investments. Fims become less willing to invest, so that the demand fo saving () shifts leftwad. The eal inteest ate, investment, and national saving all decline. Poblems fo next sections!!! Fo next section: Chapte 23: 1, 3 & 9. Chapte 26: 2 & 3. Chapte 24: 4. Remembe: This is not mandatoy. t won t be gaded. Only fo those of you that need impovement in Exam gades. ECON 1 ection 16 Page 29 ECON 1 ection 16 Page 30

6 Midtem uvey G / ection!!! Reminde: Fill the online suvey. Only 13 esponded. Go to ou website fo the link t won t take moe than 5 min. No names needed, but please only sections 104 and 133. Next class Next Class: ection 17 Wednesday, Oct 30 th P#3 DUE Today!!!! f you want moe pactice, wok on Next ections Poblems. Read ch. 23, 26 & 24. FLL THE URVEY ONLNE!!!!. You can download handouts this aftenoon. Thank you fo coming on time!!! C-U Wednesday!!. ECON 1 ection 16 Page 31 ECON 1 ection 16 Page 32