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?
If you want to learn more check out penn state harrisburg psychology
We also discuss several other topics like math 220 umd
Don't forget about the age old question of rate of change notes
If you want to learn more check out mgmt 339 csuf exam 1
We also discuss several other topics like What are the disavantages of product layout?
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