In recent years, less fluctuation in GDP… have we learned how to “tame” the economy?

(revenues < spending) How is this possible?

How can this be, though, that S = I always?

February 17 Saving, Investment and Economic Growth Snap Review: The Equality/Duality of Savings and Investment Y – C – G = I eqn 1 Now, let’s define a couple of terms:  Sprivate = Y + TR – C – T eqn. 2 [Sprivate = income + transfer payments (TR) – consumption – taxes (T)] Public Savings:  SpDon't forget about the age old question of What happens when energy is put into atom?
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ublic = T – G – TR eqn. 3 [Spublic = tax revenues – government spending – transfer payments] Total savings in the economy can be defined as:  S = Sprivate + Spublic , so we add eqns. 2 and 3 S = [Y + TR – C – T ]+ [T – G – TR]  So, cancelling terms, we are left with S = Y – C – G eqn. 4  Now, looking at eqn. 1 and 4,  I = Y – C – G eqn. 1 S = Y – C – G eqn. 4 Thus I = S, since both are = Y – C – G Thus….. S = I…. always..  Whatever is saved (i.e., not spent on goods and services by households or  government) becomes investment. How can this be, though, that S = I always???? Does this mean more S means  more I, and thus higher GDP?  1 | F e b r u a r y 1 7 , 2 0 1 5Partly this is due to how markets operate. Partly this is due to how we define I,  investment, to include any changes in inventories.  Probs. 2.7, 2.8 and 2.9, pp. 327-328 Topic 1: Government saving and dissaving  If Spublic = T – G – TR > 0, budget surplus  (revenues > spending) If Spublic = T – G – TR = 0, balanced budget  (revenues = spending) If Spublic = T – G – TR < 0, budget deficit  (revenues < spending) How is this possible? Your book talks about “crowding out” on p. 314… crowding out refers to the idea  that if the federal government runs a budget deficit, it will be forced to  borrow funds from the public which thus reduces the funds available for  firms and other private investors for investment (I), thus “crowding out”  private investors from the market. PP1 Not necessarily so, however.. whether “crowding out” takes place or not depends  on the state of the economy..  Government deficits might actually result in “crowding in”; for example, during an economic downturn, as the private sector is stimulated by increased  government spending, G, thus leading to more private investment,  especially if the economy is not operating at full employment and full  capacity.  Your book presents a “static” view of the loanable funds market. It is a dynamic  market, however.  IF, however, the economy were to be at full employment, then a government  deficit could lead to “crowding out” of private investment as interest rates  rise and loanable funds are shifted toward the public sector Topic 2: Business Cycles  2 | F e b r u a r y 1 7 , 2 0 1 5Expansion, Peak, recession, trough…. Repeat PP2 Called business cycles for a reason.. due to the decisions of private businesses  that we have such cycles Some businesses are more affected by the business cycle than others: Durable goods; more expensive goods and services (appliances, housing, some  luxury goods) PP3 Inflation as a leading indicator of recessions; unemployment a lagging indicator  PP4, 5 In recent years, less fluctuation in GDP… have we learned how to “tame” the  economy??? PP6, 7 Topic 3: Economic Growth Revisited and the Role of Government  We saw last week that for the PPF to shift outward, or alternatively for the  production curve to shift upward, that is, to have economic growth, it is  necessary to have continued increases in labor productivity, so that there is more output produced/hour of work, on average. It is NOT enough to have  more physical capital alone, or more workers, as that eventually results in  diminishing returns To overcome the dilemma of diminishing returns, an economy needs: ∙ Improved technology, typically embedded in new physical capital; so,  more physical capital is needed, as that is one mechanism for how  technology is transmitted, but it is “better” physical capital, not more  of the same. Can also be from new ideas on how to organize  production, e.g., the assembly line, JIT processes, management  techniques, etc.  This process of introducing new technology often leads to creative  destruction, as new products appear, driving out old ones, and  creating a web of inter-related new production and goods and  services that multiply out over the economy.  ∙ Improvements in human capital: training, education, learning-by doing And this is where government comes in.  To get new increases in knowledge, i.e., technology, there must be a reason for  individuals and firms to “invest” time and money in creating such  knowledge.  3 | F e b r u a r y 1 7 , 2 0 1 5That reason would be profit or higher income, but if it is not possible to “protect”  such new knowledge from others, then “free riding” will take place.  And those who take the time or spend the money to invest in creating new  knowledge will “lose”.. and there thus will be under-investment in the  creation of new technology/knowledge.  Government can support economic growth by providing protection to innovators;  government policies can stimulate the creation of knowledge via: ∙ Patents: a 20 year monopoly right to produce (generics???). These  and copyrights help to protect IPRs, intellectual property rights, i.e.,  ideas.  ∙ Subsidize R&D: via universities, labs, firms ∙ Subsidize education and health care: increases the pool of those  with advanced skills and increases the likelihood of serendipitous  advances; healthy workers are more productive workers.  There are spill-overs, i.e., public goods benefits, from both education  and health care that may seem to be focused on individuals, as well  as R&D. We also remember that government needs to develop and enforce laws that  define and protect property rights (in part, that is what patent law does).  This is called the “Rule of Law.” A country that does not enforce and protect property right and that does not  operate under the Rule of Law is more likely to be poor. [pp.  354-355] 4 | F e b r u a r y 1 7 , 2 0 1 5