Module 22
Saving,
Investment, and
the Financial System
KRUGMAN'S
MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• The relationship between savings and
investment spending
• The purpose of the four principal types of
financial assets: stocks, bonds, loans and
bank deposits
• How financial intermediaries help
investors achieve diversification
Matching up Savings and
Investment Spending
• Physical Capital
(factories, shopping
malls, machinery, etc. –
usually paid through
borrowing.)
• The Source of Physical
Capital (must come from
somewhere – what
happens when this “dries
up”?)
The Savings-Investment Spending Identity
• Assume a simple economy
• Total Income = Total Spending
• Total Income = Consumption + Savings
• Total Spending = Consumption+ Investment
• Consumption + Savings = Consumption +
Investment .: Savings = Investment
The Savings-Investment Spending Identity
• Now, more complexity
•Budget Surplus
•Budget Deficit
•Budget Balance
•National Savings v. Private Savings
•Capital inflow
The Financial System
• Wealth
• Financial Asset
• Physical Asset
• Liability
Three Tasks of a Financial System
• Reducing Transaction Costs
• Reducing Risk
• Financial Risk
• Diversification
• Providing Liquidity
• Liquid
• Illiquid
Types of Financial Assets
• Loans
• Bonds
• Default
• Loan-backed Securities (Collateralized Debt
Obligation - CDO)
• Stocks
Types of Financial Assets
1.
Loans
A loan is a lending agreement between an individual lender and
an individual borrower.
2.
Bonds
The seller of a bond promises to pay a fixed sum of interest each
year and to repay the principal—the value stated on the face of
the bond—to the owner of the bond on a particular date.
3.
Loan-backed Securities
Loan-backed securities are assets created by pooling individual
loans and selling shares in that pool (a process called
securitization). (Key to 2008 Financial Collapse)
4.
Stocks
A stock is a share in the ownership of a company.
Financial Intermediaries
• Mutual Funds
• Pension Funds
• Life Insurance Companies
• Banks
• Bank deposit
• Fractional reserve banking