Principles of Macroeconomics PowerPoint Presentations PDF

PowerPoint Presentations for Principles of Macroeconomics Eighth Canadian Edition by Mankiw/Kneebone/McKenzie Adapted for the Eighth Canadian Edition by Marc Prud’Homme Univer...

PowerPoint Presentations for Principles of Macroeconomics Eighth Canadian Edition by Mankiw/Kneebone/McKenzie Adapted for the Eighth Canadian Edition by Marc Prud’Homme University of Ottawa Copyright © 2020 by Nelson Education Ltd. 8-1 SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM Chapter 8 Copyright © 2020 by Nelson Education Ltd. 8-2  SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM  There are various ways for you to finance capital investments.  Borrow the money, perhaps from a bank or from a friend or relative.  Convince someone to provide the money for your business in exchange for a share of your future profits.  Financial system is the group of institutions in the economy that help to match one person’s savings with another person’s investment. Copyright © 2020 by Nelson Education Ltd. 8-3  SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM  Saving and investment are key ingredients to long-run economic growth.  When a country saves a large portion of its GDP, more resources are available for investment in capital, and higher capital raises a country’s productivity and living standard.  This chapter examines how the financial system works. Copyright © 2020 by Nelson Education Ltd. 8-4  FINANCIAL INSTITUTIONS IN THE CANADIAN ECONOMY  Financial institutions can be grouped into two categories:  Financial markets  Financial intermediaries Copyright © 2020 by Nelson Education Ltd. 8-5  FINANCIAL INSTITUTIONS IN THE CANADIAN ECONOMY FINANCIAL MARKETS  Financial markets are financial institutions through which savers can directly provide funds to borrowers.  Bond is a certificate of indebtedness that specifies the obligation of the borrower to the holder of the bond.  Characteristics:  The bond’s term  The bond’s credit risk Copyright © 2020 by Nelson Education Ltd. 8-6  FINANCIAL INSTITUTIONS IN THE CANADIAN ECONOMY FINANCIAL MARKETS (CONT’D)  Stock represents ownership in a firm and is, therefore, a claim to its profits.  Equity finance: the sale of a stock to raise money.  The prices at which shares trade on stock exchanges are determined by the supply and demand for the stock.  Stock index: an average of a group of stock prices.  Dow Jones Industrial Average  S&P/TSX Composite Index  Because stock prices reflect expected profitability, stock indexes are watched closelyCopyright as possible indicators of future economic8-7 © 2020 by Nelson Education Ltd. conditions. FY How to Read Stock Tables I Copyright © 2020 by Nelson Education Ltd. 8-8  FINANCIAL INSTITUTIONS IN THE CANADIAN ECONOMY  Financial intermediaries: financial institutions through which savers can indirectly provide funds to borrowers.  Bank: the primary function of a bank is to take deposits from savers and use these deposits to make loans to people who want to borrow.  Mutual fund: an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds.  Allows diversification.  Access to the skills of ©professional Copyright money 2020 by Nelson Education Ltd. managers. 8-9 Quick Qui z What is a stock? What is a bond? How are they different? How are they similar? Copyright © 2020 by Nelson Education Ltd. 8-10 SAVING AND INVESTMENT IN THE NATIONAL INCOME ACCOUNTS  Accounting: refers to how various numbers are defined and added up.  The national income accounts include, in particular, GDP and many related statistics. Copyright © 2020 by Nelson Education Ltd. 8-11  FINANCIAL INSTITUTIONS IN THE CANADIAN ECONOMY SOME IMPORTANT IDENTITIES In a closed economy: Copyright © 2020 by Nelson Education Ltd. 8-12  FINANCIAL INSTITUTIONS IN THE CANADIAN ECONOMY SOME IMPORTANT IDENTITIES (CONT’D) National saving (S) is the total income in the economy that remains after paying for consumption and government purchases. Copyright © 2020 by Nelson Education Ltd. 8-13  FINANCIAL INSTITUTIONS IN THE CANADIAN ECONOMY SOME IMPORTANT IDENTITIES  Let T denote the(CONT’D) taxes collected by government minus transfer payments.  National saving can then be expressed in either of two ways: or Copyright © 2020 by Nelson Education Ltd. 8-14  FINANCIAL INSTITUTIONS IN THE CANADIAN ECONOMY SOME IMPORTANT IDENTITIES  (CONT’D) Private saving is the income that households have left after paying for taxes and consumption.  Public saving is the tax revenue that the government has left after paying for its spending. Budget Budget deficit: surplus: Copyright © 2020 by Nelson Education Ltd. 8-15 SAVING AND INVESTMENT IN THE NATIONAL INCOME ACCOUNTS THE MEANING OF SAVING AND INVESTMENT  The terms saving and investment can sometimes be confusing.  Although the accounting identity S = I shows that saving and investment are equal for the economy as a whole, this does not have to be true for every individual household or firm. Copyright © 2020 by Nelson Education Ltd. 8-16 Quick Qui z Define the following: 1. Private saving 2. Public saving 3. National saving 4. Investment 5. How are they related? Copyright © 2020 by Nelson Education Ltd. 8-17 Active Learning A. Calculations  Suppose GDP equals $10 billion, consumption equals $6.5 billion, the government spends $2 billion and has a budget deficit of $ 300 million.  Find public saving, taxes, private saving, national saving, and investment. Copyright © 2020 by Nelson Education Ltd. 8-18 Active Learning Answers (Part A)  Given: Y = 10.0, C = 6.5, G = 2.0, G – T = 0.3  Public saving = T – G = – 0.3  Taxes: T = G – 0.3 = 1.7  Private saving = Y – T – C = 10 – 1.7 – 6.5 = 1.8  National saving = Y – C – G = 10 – 6.5 = 2 = 1.5  Investment = national saving = 1.5 Copyright © 2020 by Nelson Education Ltd. 8-19 Active Learning B. Calculations  Use the numbers from the preceding exercise but suppose now that the government cuts taxes by $200 million.  In each of the following two scenarios, determine what happens to public saving, private saving, national saving, and investment.  Consumers save the full proceeds of the tax cut.  Consumers save 1/4 of the tax cut and spend the Copyright © 2020 by Nelson Education Ltd. 8-20 other 3/4. Active Learning Answers (Part B)  In both scenarios, public saving falls by $200 million, and the budget deficit rises from $300 million to $500 million. 1. If consumers save the full $200 million, national saving is unchanged, so investment is unchanged. 2. If consumers save $50 million and spend $150 million, then national saving and investment each fall by $150 million. Copyright © 2020 by Nelson Education Ltd. 8-21 Active Learning C. Discussion questions  The two scenarios from this exercise are: 1. Consumers save the full proceeds of the tax cut. 2. Consumers save 1/4 of the tax cut and spend the other 3/4.  Which of these two scenarios do you think is more realistic?  Why is this question important? Copyright © 2020 by Nelson Education Ltd. 8-22 THE MARKET FOR LOANABLE FUNDS  Market for loanable funds: the market in which those who want to save supply funds and those who want to borrow to invest demand funds. Copyright © 2020 by Nelson Education Ltd. 8-23 THE MARKET FOR LOANABLE FUNDS SUPPLY AND DEMAND FOR LOANABLE FUNDS  Saving is the source of supply for loanable funds.  Investment is the source of demand for loanable funds.  The interest rate is the price of a loan. Copyright © 2020 by Nelson Education Ltd. 8-24 FIGURE 8.1 The Market for Loanable Funds Copyright © 2020 by Nelson Education Ltd. 8-25 THE MARKET FOR LOANABLE FUNDS POLICY 1: SAVING INCENTIVES  A higher saving rate could lead to a higher rate of growth of GDP.  People respond to incentives:  Consumption taxes like the GST  RRSPs  TFSAs  RESPs Copyright © 2020 by Nelson Education Ltd. 8-26 FIGURE 8.2 An Increase in the Supply of Loanable Funds Copyright © 2020 by Nelson Education Ltd. 8-27 THE MARKET FOR LOANABLE FUNDS POLICY 2: INVESTMENT INCENTIVES  An investment tax credit gives a tax advantage to any firm building a new factory or buying a new piece of equipment. Copyright © 2020 by Nelson Education Ltd. 8-28 FIGURE 8.3 An Increase in the Demand for Loanable Funds Copyright © 2020 by Nelson Education Ltd. 8-29 THE MARKET FOR LOANABLE FUNDS POLICY 3: GOVERNMENT BUDGET DEFICITS AND SURPLUSES  Government debt is the sum of past budget deficits and surpluses.  Crowding out is a decrease in investment that results from government borrowing. Copyright © 2020 by Nelson Education Ltd. 8-30 FIGURE 8.4 The Effect of a Government Budget Deficit Copyright © 2020 by Nelson Education Ltd. 8-31 THE MARKET FOR LOANABLE FUNDS POLICY 3: GOVERNMENT BUDGET DEFICITS AND SURPLUSES (CONT’D)  Why does increased borrowing from the government shift the supply curve, while increased borrowing by private investors shifts the demand curve?  The model takes the term loanable funds to mean the flow of resources available to fund private investment; thus, a government budget deficit reduces the supply of loanable funds. Copyright © 2020 by Nelson Education Ltd. 8-32 FIGURE 8.5 Federal and Provincial/ Territorial Net Debt in Canada Copyright © 2020 by Nelson Education Ltd. 8-33 Quick Qui z If more Canadians adopted a “live for today” approach to life, how would this affect saving, investment, and the interest rate? Copyright © 2020 by Nelson Education Ltd. 8-34 Classroom Activity Create a Portfolio Assume you have $100 000 in savings. Create a portfolio of securities worth $100 000. Decide what financial instruments you would like to use, then find their current prices in the newspaper. 1. Calculate your holdings of each security, based on current prices. 2. What objectives do you have for this portfolio? Was it chosen to maximize short-term gains, long-term stability, Copyright © 2020 by Nelson Education Ltd. 8-35 Classroom Activity Create a Portfolio (cont’d) 3. Explain how each of the following economic events would affect the value of your portfolio. A. An increase or decrease in interest rates B. A recession C. Rapid inflation D. A depreciation of the Canadian dollar Copyright © 2020 by Nelson Education Ltd. 8-36 THE END Copyright © 2020 by Nelson Education Ltd. 8-37