Transcript IM_04 - BUS 313 - University of Hawaii

Integrated Markets
Part IV
Feldstein-Horioka
Saving = Investment
 Elementary
macroeconomics tells
us that the above must be true
 More advanced economics keeps
this equality but modifies it with
realistic additives like the current
account and the government
budget (Ex – Im and G – T)
Digression on Why
 Advanced
macroeconomics
presents the elementary I = S
as the more complicated
 I + G + Ex = S + T + Im
 Consumers (general public)
may produce all of GDP, but
they purchase only about 2/3
First I + G + Ex
 These
are non-consumer
components of total demand:
investors (businesses) buying
their machines & other items;
the government buying its
energy, education,
infrastructure; foreigners
buying our exports
Now S + T + Im
 This
is a supply concept
 The three terms add up to be
components of GDP not purchased
by consumers
 But consumers (general public)
produced these components
 By not purchasing them, they
“supply” these goods for others
In Other Words
 GDP
= Gross Earned Income = C +
S + T + Im
 C is spent on consumption
 S + T + Im is money not spent
(goods not purchased), but the
money goes to financial
institutions, the government and to
foreigners
Finally
 Financial
institutions lend the
money to consumers, the
government & business
 The government transforms its
share (T) into spending (G)
 Foreigners use the money to
spend or invest in our country (Ex
or capital inflow)
Saving  Investment
 In
a relatively closed economy,
S & I normally rise & fall
together: S  I
 In an open economy, this link is
broken: S  I
 Big saving countries lend to
low savers
Some Macroeconomics
S – I = G – T + Ex – Im
 = G – T + CA
 = G – T – KA
 So, S + KA – I = G – T
 Whatever fiscal policy may be (G – T),
saving & investment are separated by
capital account

S + KA – I = G – T
G – T  0, a low saving country
with good investment possibilities
will have a capital inflow (KA > 0)
 If G – T is large & positive (deficit),
KA will be correspondingly large &
positive (USA)
 Japan? Vietnam? Korea?
 If
Final Note
 These
four market standards
actually fail to indicate much
integration beyond the fairly
tight relationship between USA
and Japan
 Not even USA & most European
countries