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Saving, Capital Formation, and Financial Markets
Saturday, March 5, 2016

1:51 PM

Saving and Wealth
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National saving determines the capacity of an economy to create new capital
Saving: current income - spending on current needs
Saving Rate: saving/income
Wealth: value of assets - liabilities
○ Assets: anything of value that one owns
§ Financial: cash, a checking account, stocks, bonds, etc
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○ Liabilities: the debts one owes
§ I
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credit card balances, mortgages, student loans
Balance Sheet: a list of an economic unit's assets and liabilities on a specific date
Flow: a measure that is defined per unit of time
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saving
Stock: a measure that is defined at a point in time
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wealth
The flow of savings causes the stock of wealth to change at the same rate
Capital Gains: increases in the value of existing assets
Capital Losses: decreases in the value of existing assets
○ Change in wealth = saving + capital gains - capital losses
In the 1990s, capital gains increased household wealth by so much that people
saw no need to save

National Saving and its Components

• National saving is the aggregate saving of the economy
○ Includes saving of business firms, government, and households
○ Investment spending is not part of spending on current needs
○ Household spending on consumer durables (i
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cars, appliances) is a
combination of spending on current needs and future needs
○ Public capital provided by the government (i
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bridges, schools,) is a
mixture of spending on current needs and future needs
• National Saving: the saving of the entire economy
○ S = Y - C - G
• Transfer Payments: payments the government makes to the public for which it
receives no current goods or services in return
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Social Security, welfare, pensions

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mixture of spending on current needs and future needs
National Saving: the saving of the entire economy
○ S = Y - C - G
Transfer Payments: payments the government makes to the public for which it
receives no current goods or services in return
○ I
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Social Security, welfare, pensions
Private saving is the amount households and businesses save from privatesector income
Public saving is the amount governments save from public-sector income
Net taxes: T = total taxes - transfer payments - government interest payments
Private Saving: the saving of the private sector of the economy (household
saving and business saving)
○ S(private) = Y - T - C
Business saving is the funds remaining after payment have been made to
salaries, operating costs, shareholder's dividends, etc
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S

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