Savings and Investment: The Connection between National Economies and Global Trade, Diapositivas de Economía

¡Descarga Savings and Investment: The Connection between National Economies and Global Trade y más Diapositivas en PDF de Economía solo en Docsity! Lecture 1: The Global Economy and Macroeconomics Economics II Spring 2021 3.Savings and Investment Lecture 3: Savings and Investment The intuition behind Saving and Investment Page 2 Imagine you’re an entrepreneur: • Each month, you earn 1000€ for the services your start-up provides. • Of course, you need to pay some taxes to the Government. Let’s say 10% • So, actually, you earn 900€ and you spend it all because you’re living la vida loca. • This month, you want to subscribe to a platform for young entrepreneurs, but it costs 200€ per month. • Can you pay this monthly subscription? Only if you spend 200€ less, which is something you’re not willing to do. • A couple of months later, you hear that there’s some Government help you can get (State aids): 100€ per month. But you can’t still pay for the subscription. • You’re lacking 100€. You go home, cry a little, and make your parents give you the remaining 100€. • Moral of the story: investments can only be paid with your savings, or with the help of the Government or with the help of Others. Lecture 3: Savings and Investment Trade deficit and capital inflows Page 5 Why is the difference between S – I equal to net exports? • When S < I A country is using more resources than are available to it from domestic production alone. A country can do that only by importing goods from the rest of the world. More precisely, the country must import more from the rest of the world than it exports to the rest of the world, so that on balance it is receiving real resources from abroad. So, in this case, S < I (negative) = NX (negative = trade deficit) Obviously, since we couldn’t afford those goods (because our savings were low), foreign countries allowed us to purchase them with a loan. We owe them. In this case, we would say that this country has financing needs (it needs money from foreign countries to purchase the rest of goods that it needs) and there are capital inflows (the money from other countries is entering our country, allowing us to finance the part of investment that our domestic savings couldn’t manage) So, the equation can also be seen as : S < I (negative = financing needs) = NX (negative = capital inflows) Lecture 3: Savings and Investment Trade surplus and capital outflows Page 6 Why is the difference between S – I equal to net exports? • When S > I What happens to the national output (GDP) that is produced but it’s neither consumed nor invested? It is exported to foreigners. It’s like saying “we have more than we need”, so we end up exporting more than importing. So, in this case, S > I (positive) = NX (positive = trade surplus) Obviously, now we are the ones who can make loans to other countries that need our products. In this case, we would say that this country has lending capacity (it has surplus of money that it can use to finance other countries) and there are capital outflows (there’s more money flowing out of our country than coming in - because we already have too much) So, the equation can also be seen as : S > I (positive = lending capacity) = NX (positive = capital outflows) Lecture 3: Savings and Investment The intuition behind Saving and Investment Page 7 GDP = C + I + G + X – M + T – T T = direct taxes (they are not included in the demand side because they’re not an expenditure. They have no counter party) • Disposable Income = Total Income – Taxes  GDP – T • Private Savings = Disposable Income – Consumption  PS = (GDP – T) – C • Government: Surplus (T-G) or Deficit (G-T) • External sector: Capital inflows (M-X) or Capital outflows (X-M) • Total Savings = PS + Gov. Surplus = S • GDP = C + I + G + (X – M) + T – T PS DEF Cap.Outflows • (GDP – T) – C = I + G + (X – M) – T  (GDP – T) – C = I + (G –T) + (X – M) PS Gov.Surplus Cap.Inflows I = (GDP – T) – C + (T – G) + (M – X) As we knew, Investment can only be financed through Private Savings (PS), Public Savings (T-G) or Capital Inflows (M - X) Lecture 3: Savings and Investment Practical example Page 10 In a country where Private Savings is greater than Investment (PS > I), and there’s trade Surplus (M < X), then: PS – I = (G – T) + (X – M) (+) (?) (+) If we were to analyze this economy, we would say that: • First of all, we know that the economy has lending capacity (X-M is positive: trade surplus). Which means that S > I (total savings higher than investment) • Since the private sector savings is already higher than investment (PS > I), then we don’t actually know what’s going on with the savings of the Government. • It could be true that there’s a gov. deficit (G > T), offset by the savings of the private sector (so that total savings are actually higher than Investment). • Or the gov. is running a budget surplus (G < T). (?) The sign of G-T is undefined with the current information Lecture 3: Savings and Investment Saving and Investment in Spain Page 11 I = PS + (T – G) + (M – X) • Prior 2008 (them happy days), • Private savings were lower than investment (PS < I). • The Government run a balanced budget (T ~G). • We also had trade deficit (X < M). Capital from abroad flooded this country. • After the Global Financing Crisis (2008) and the Debt Crisis (2012) the situation changed: • Private Savings is higher than Investment (PS > I) • We became a net exporter country (we now have trade surplus and can finance other countries, X > M) • The Government kept spending more, running a budget deficit (G > T). • Due to austerity measures, G>T has been diminishing over the years. PS - I = (G – T) + (X – M) -15% -10% -5% 0% 5% 10% 15% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 SPAIN: SOURCE OF SAVINGS (% GDP) X-M G-T PS - I Source: Haver, BBVA AM Lecture 3: Savings and Investment Saving and Investment in Germany Page 12 I = PS + (T – G) + (M – X) • Since 2000s, Germany has always had PS-> I. • Goverment balance has been mostly in deficit until the Sovereign Debt Crisis (2012). Ever since, Germany has been focused on running a goverment surplus. • Germany is a net exporter country (X>M), which also means that it can finance other countries (capital outflows > capital inflows). PS - I = (G – T) + (X – M) -4% -2% 0% 2% 4% 6% 8% 10% 12% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 GERMANY: SOURCE OF SAVINGS (% GDP) X-M G-T PS - I Source: Haver, BBVA AM