...Approach. These approaches came to play when Adam Smith and John Maynard Keynes by coming up with theories which are mostly based on assumptions in their attempt to explain the relationship between savings and investment in a capital market of an economy. According to the classicals, the savings and investment equity assumption requires the household savings to equal the capital investment expenditures. They believe that should savings not equal the investment the flexible interest rate should be able to restore the equilibrium. Thus, in a beautiful free world of classical economics, no human or government intervention is required to lead the capital market to be at equilibrium as well. This is based on the assumption that in the long run, full employment of resources would be attained and that any human effort to restore the equilibrium point would rather do the economy more harm than good. If the economy does not follow this assumption and shows a mismatch in savings and investment, the classicals provide the “evergreen solution” – do nothing, it is temporary and will correct itself. They also believed that the major determinant of savings and investment is interest rate. According to them, interest rate is positively or directly related to savings but inversely related to investment. Another important assumption of the classicals is the belief in the Say’s Law: “Supply creates its own...
Words: 1045 - Pages: 5
...Assignment ON IT&D (Savings & Investments of Brazil) Submitted to- Submitted By- Mr. Ajay Kumar Paramjit Singh (Assistant Professor) MBA-2B Introduction Brazil has achieved remarkable progress since the mid-1990s, largely owing to a strengthening of public institutions, in particular the inflation targeting framework coupled with exchange rate flexibility and the Fiscal Responsibility Law. Improvement in the social area has also been impressive, with a remarkable fall in poverty and inequality. Most product markets have been opened up, and labour market informality has receded. The count1ry is now reaping the benefits of economic stability and increasing resilience, which, together with a timely macroeconomic policy response combining monetary easing, some fiscal stimulus and credit expansion, allowed Brazil to withstand the 2008-09 global financial crisis well. Real GDP growth of 7.5% in 2010 was the highest since 1986 and the fifth-best performance amongst the G20 countries (Table 1). This robust growth is estimated to have removed all remaining slack from the economy. Over the next two years, real GDP growth is foreseen to slow to less than 4%, well below trend...
Words: 2472 - Pages: 10
...structure my summary similar to the way chapter twenty-six does. First by talking about different financial institutions and how they work in the U.S. economy. Then by breaking down saving and investment in the national income accounts. Lastly I will explain how government policies affect society’s allocation of resources by manipulating the interest rate. The first thing chapter twenty-six does is explain what a financial system is and why they are needed. A financial system is defined in the book as a group of institutions in the economy that help to match one person’s saving with another person’s investment. Without a financial system, long-term economic growth is not going to happen. Saving and investment allows for higher capital which in return raises productivity and the living standard. Financial institutions allow for the economy's scarce resources to move from savers to borrowers. Savers only provide their money to financial institutions for one reason and that is to gain interest. Interest allows savers to ultimately make money by storing their money in financial markets. Financial markets allow savers to be able to directly supply funds to borrowers. The two main financial markets are the stock market and the bond market. Financial markets are what particularly interest me. Increasing my savings is very important to me and figuring out strategies to do that efficiently is something I will start doing not too many years from now. A bond is a certificate which obligates...
Words: 1223 - Pages: 5
...established by economically weak persons. This organization functions under their mutual co-operation of all the members. Specially, co-operative organization is such autonomous organization, which is established voluntarily by the group of persons for the fulfillment of the social, economical and cultural expectations with the democratic control and flow. If we analyze the history of it, we can find that it is the organization established by economically and socially exploited people from the rich businessmen. At the outset, the co-operative organization came into existence after the establishment of consumers co-operative society named as 'Rochdale society of equitable pioneers' in England by Robert Owen with the objective of saving poor people from economic exploitation, to eliminate the middlemen and to make the ideal society in October 24, 1944 A.D. After the establishment of it, such organizations were developed in Germany, Italy, France, and Japan in 1850 A.D. Sulj established a co-operative organization to save the farmers providing the loan at the lower rate of interest with the result of the development of co-operatives, International Co-operative Alliances were established in 1895 A.D. in England. "Co-operative is the form of organization in which persons voluntarily associate together as human beings on the basis of equality together as human beings on the basis of equality for the promotion of economic interests themselves[1]. " From the...
Words: 4279 - Pages: 18
...RELATIONSHIP BETWEEN DOMESTIC SAVING AND INVESTMENT IN INDIA FROM 1950-51 to 2006-07 Soni Kshamank MSc. (Hons) Economics, 4th year, Birla Institute of Science and Technology and Science, Goa, India Email: kshamanksoni@gmail.com Bhala Shailesh N. MSc. (Hons) Economics, 4th year, Birla Institute of Science and Technology and Science, Goa, India Email: shailesh2710@gmail.com Goel Mridula Associate Prof. and Head of Department Of Economics, Birla Institute of Science and Technology and Science, Goa, India Email: mridula@bits-goa.ac.in ABSTRACT The subject of correlation between savings and investment has been of great interest since the last thirty years. The Feldstein-Horioka puzzle, which is one of the six major puzzles in economics, compares the liquid short term capital mobility and its compatibility with high investment-saving correlation in OECD economies in the long run. Economists often claim that higher savings contribute to increased investment and GDP growth in a country via the multiplier effect, as is indicated by higher GDP growth rate in India and China. This paper studies the dynamics of saving-investment correlation in India using the annual data from 1952-53 to 2006-07 by splitting it in two periods: pre-liberalization and post-liberalization. Hence it analyses the degree of capital mobility in India post-liberalization and compares it with the pre-liberalization period. Keywords: India, Savings, Investment, Regression coefficient,...
Words: 4482 - Pages: 18
...TOPIC 7 – FINANCIAL MARKETS Eco 304L Fall 2014 Topic 6 – Financial Markets The Financial System -‐ How Businesses Finance Themselves Saving and Investment (National Income Accounting Redux) Ricardian Equivalence and Temporary vs. Permanent Taxt Cuts The Market For Loanable Funds – Modeling Financial Markets 1 Topic 6 – Financial Markets The Financial System -‐ How Businesses Finance Themselves The Financial System The Pinancial system is made up of !inancial institutions that bring borrowers and lenders together ¤ Financial markets: institutions through which borrowers and lenders come together directly ¤ bond markets n stock markets n ¤ Financial intermediaries: organizations that interact with borrowers and lenders separately and bring them together indirectly banks n mutual fund n 2 Financing a company ¨ How can a company raise funds? Self-‐!inance ¤ Borrow indirectly...
Words: 1610 - Pages: 7
...Lecture 6 and 7: The Aggregate Expenditures Model Reference - Chapter 7 learning OBJECTIVES 1. The factors that determine consumption expenditure and saving. 2. The factors that determine investment spending. 3. How equilibrium GDP is determined in a closed economy without a government sector. 4. What the multiplier is and its effects on changes in equilibrium GDP. 5. How adding international trade affects equilibrium output. 6. How adding the public sector affects equilibrium output. 7. The distinction between equilibrium versus full-employment GDP. I. Introduction A. This chapter focuses on the aggregate expenditures model. We use the definitions and facts from previous chapters to shift our study to the analysis of economic performance. The aggregate expenditures model is one tool in this analysis. Recall that “aggregate” means total. B. As explained in this chapter’s Last Word, the model originated with John Maynard Keynes (Pronounced Canes). II. Simplifying Assumptions for the Simple Model A. We assume a “closed economy” with no international trade. B. No Government. C. Although both households and businesses save, we assume here that all saving is personal. D. Depreciation and net foreign income are assumed to be zero for simplicity. E. There are two reminders concerning these assumptions. 1. They leave out two key components of aggregate demand...
Words: 2519 - Pages: 11
...Gabriella Jackson "High saving promotes faster growth. So having more savers in the global economy should be good for our long run prosperity." Long-term economic growth is the expansion of the productive potential of an economy. Therefore, to ensure such growth, aggregate supply must continually shift outwards as shown in the diagram below. AS AS Price Level 1 2 P 1 P 2 AD Figure 1: Long-term economic growth 1 Real Gross Domestic Product Y Y 1 2 The diagram shows aggregate supply shifting outwards from AS to AS and consequently the price level falls from P to P and real gross domestic product rises from Y to Y . 1 1 1 2 2 2 Saving refers to the income of a household, firm or government that is not spent but set aside for future consumption or investment. It is vital to an economy because it provides finance for capital investment. Investment refers to the purchase of capital goods, which are used to aid further production, meaning the productive potential of the economy increases. Without such investment, aggregate supply and the productive potential of the economy would remain static. If this were to be accompanied by aggregate demand increasing at a fast pace, overheating in the economy would be the likely result. AS Price Level 1 P P 2 1 AD 1 Real Gross Domestic...
Words: 2963 - Pages: 12
...Relationship between the Savings Rate and Economic Growth of China By: Muhammad Saddam Hossain Institute of Business Administration, Jahangirnagar University Submitted to: Dr. Shuddhasattwa Rafiq Associate Professor, Institute of Business Administration, Jahangirnagar University Submitted by: Muhammad Saddam Hossain Batch: 21st Class ID: 1565 Date of Submission: June 11, 2013 Institute of Business Administration, Jahangirnagar University 1 Table of Contents: Contents 1. Introduction 2. Savings Rate 3. China’s High Savings Rates 4. How to calculate Savings Rate a. Private saving b. Public saving c. National Saving d. Savings Rate 5. China’s Comparative Savings Rate 6. Relationship between the saving rate and economic growth 7. Savings Rate Vs Economic Growth of China 8. Conclusion Page 3 3 3 4 4 4 4 4 5 6 7 9 Illustrations: Contents Figure 1: National Saving Rate by Region Figure 2: Relation Between savings rate and Growth Figure 3: Saving and Investment Rate of China Table 1: National Reserves by Countries Page 5 6 7 8 2 Introduction: A savings rate is refers to the percentage of Gross Domestic Product (GDP) savings by households in a country. It indicates the financial state and growth of the country, as household saving is the main source of government borrowing to fund public services. It varies among countries and is influenced by various factors such as retirement age, borrowing constraints, income distribution over lifetime...
Words: 1982 - Pages: 8
...Background of the Study According to John Keynes, an investment is a conscious act of an individual or entity that involves deployment of money in securities of assets issued by any financial institution with a view to obtain the target returns over a specified period of time. There are several types of investment. An autonomous investment is a kind of investment that remains constant regardless of revenue level. And this means that when the revenue is low, the autonomous investments are still the same. This refers to the investment made on public buildings, roads, houses and other infrastructure. Typically the government is in this kind of investment. Induced investment is certainly related to the revenue level. That is, when at high level...
Words: 2482 - Pages: 10
...UNIVERSITY OF LIMERICK KEMMY BUSINESS SCHOOL DEPARTMENT OF ECONOMICS INTERNATIONAL POLITICAL ECONOMY AUTUMN 2012 Test 1 Lecturer: Dr Anthony Leddin, Department of Economics Marking scheme Test 1 Date due: Instructions § § § § § § § § Please attempt all 100 multiple choice questions. This is an open book test. However, this is not a group assignment. All questions carry equal marks. Only one correct answer. No negative mark for non-attempt or wrong answer. Please fill-in the bubble answer sheet using a 2B pencil. No pen or ink. Make sure you name and ID number are correctly given on the computer sheet. A correct set of answers will be made available following submission. This will enable students to check and review their answers. 25 % of Internally Assessed Component 9th November 2012 Name (Block letters): ____________________________ ID Number ____________________________________ Date: ______________ 1. Macroeconomics does not try to answer the question of: A) why do some countries experience rapid growth. B) what is the rate of return on education. C) why do some countries have high rates of inflation. D) what causes recessions and depressions. 2. All of the following are important macroeconomic variables except: A) real GDP. B) the unemployment rate. C) the marginal rate of substitution. D) the inflation rate. 3. Deflation occurs when: A) real GDP decreases. B) the unemployment rate decreases. C) prices fall. D) prices increase, but at a slower...
Words: 4511 - Pages: 19
...1) The companies allow many workers to hold large amounts of stock at work because of the reason that they want the productivity of the workers to increase. Since the workers are getting a higher payment from the company they are encouraged to put more effort. The people might not want to hold stock in the company where he works because he might not want to have a higher payment in the company. The worker might not want to get joined to the performance of the company. 2) a. It is strenuous to decrease taxes on private saving and reduce government shortage at the same time because a reduction in taxes expands budget debt which is just opposite of the second measure. b. If sufficient connection were to be found between decrease in tax rates...
Words: 502 - Pages: 3
...CHAPTER 9 Basic Macroeconomic Relationships A. Short-Answer, Essays, and Problems 1. Define the consumption and saving schedules. 2. Explain how consumption and saving are related to disposable income in the aggregate expenditures model. 3. Complete the following table assuming that (a) MPS = 1/5, (b) there is no government and all saving is personal saving. Level of output and income Consumption Saving $250 $260 $___ 275 ____ ___ 300 ____ ___ 325 ____ ___ 350 ____ ___ 375 ____ ___ 400 ____ ___ 4. Complete the following table assuming that (a) MPS = 1/3, (b) there is no government and all saving is personal saving. Level of output and income Consumption Saving $100 $120 $___ 130 ____ ___ 160 ____ ___ 190 ____ ___ 220 ____ ___ 250 ____ ___ 5. Differentiate between the average propensity to consume and the marginal propensity to consume. 6. What are the marginal propensity to consume (MPC) and marginal propensity to save (MPS)? How are the two concepts related? How are the two concepts related to the consumption and saving functions? 7. Suppose a family’s annual disposable income is $8,000 of which it saves $2,000. (a) What is their APC? (b) If their income rises to $10,000 and they plan to save $2,800, what are their MPS and MPC?...
Words: 5910 - Pages: 24
...Saving Function KM: The Multiplier Model - Principles of Macro - RIT - Dr. Jeffrey Burnette The Keynesian Model: The Multiplier Model Assumptions • Each market is analyzed on an aggregate scale (One interest rate, One type of labor, One type of output) Differences from the Classical Model • The Keynesian model does not assume that markets clear in the short-run. In fact, it believes that prices are sticky downward. That is, prices may not decrease to bring the market to equilibrium. This is why it focuses on the short-run. • In the short-run spending depends upon income. • Whereas the classical model focused on equilibrium in the labor market determining the level of output, the Keynesian model will focus on the domestic spending of consumers. The Keynesian Model w/out Government • Households have 2 choices for spending their income, Purchase goods and services (Consumption) or Save. • Firms have 2 types of expenditures, purchase goods and services (Consumption) or purchase equipment and structures from borrowed funds (Planned Investment). • In the short-run, planned investment is taken to be independent of income. • There is a funds market where savings is made available to firms that wish to borrow. Disposable Income = Income - Taxes Since there is no government, taxes are equal to zero. Therefore, real income is equal to real disposable income. Y = YD 1 KM: The Multiplier Model - Principles of Macro - RIT - Dr. Jeffrey Burnette Consumption Function - Algebraic...
Words: 3228 - Pages: 13
...This resulted in SGE having to incur demurrage charges at a rate of $2000 per day. Mike Armstrong, manager of port facilities for SGE, had just learned that the Canadian Government had negotiated a 5-year contract with Poland, and that Superior had been allocated some of the shipments. However, the two wharfs Superior currently had might not be enough to carry out the contract efficiently, and building a third wharf was being considered. The third wharf was estimated to cost $1,500,000. Superior Grain Elevator needs to consider the pros and cons of building a third wharf and decide if the benefits & savings will offset the cost of the investment. After careful consideration and analysis, using the ROI, NPV, FV formulas and @Risk, we do not recommend for SGE to build a third wharf. Even though the construction of the third wharf will provide the company a mean of savings of $230,115 per season, or $1,150,575 in five years, it does not offset the cost of building the new wharf ($1,500,000). BACKGROUND Superior Grain Elevator’s 14 giant grain elevators gave it a prominent position on the Thunder Bay waterfront in Ontario, Canada. Thunder Bay was Canada’s third busiest port and was very...
Words: 1662 - Pages: 7
