Transcript Saving

10
Basic Macroeconomic
Relationships
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Income Consumption and Saving
• Consumption (C) and Saving (S)
• Primarily determined by
Disposable Income (DI)
• Directly related to DI
• Saving = “not spending”
LO1
Income, Consumption, and Saving
LO1
Income Consumption and Saving
• Consumption schedule
• Planned household spending at
•
LO1
different levels of DI
Saving schedule
• S = DI - C
• Planned household saving at
different levels of DI
Consumption and Saving Schedules
TABLE 10.1 Consumption and Saving Schedules (in Billions) and Propensities to Consume and Save
(4)
(1)
Level of
Output
and
Income
(GDP=DI)
(2)
Consumption
(C)
(3)
Saving
(S),
(1) – (2)
(1) $370
$375
$-5
(6)
Average
Propensity
to
Consume
(APC),
Average
Propensity
to Save
(APS),
(2)/(1)
(7)
Marginal
Propensity
to
Consume
Marginal
Propensity
to Save
(3)/(1)
(MPC),
(2)/(1)*
(MPS),
(3)/(1)*
1.01
-.01
.75
.25
1.00
.00
.75
.25
(5)
(dissaving)
(2)
390
390
0 (breakeven)
(3)
410
405
5
.99
.01
.75
.25
(4)
430
420
10
.98
.02
.75
.25
(5)
450
435
15
.97
.03
.75
.25
(6)
470
450
20
.96
.04
.75
.25
(7)
490
465
25
.95
.05
.75
.25
(8)
510
480
30
.94
.06
.75
.25
(9)
530
495
35
.93
.07
.75
.25
(10) 550
510
40
.93
.07
.75
.25
LO1
Consumption (billions of dollars)
Consumption and Saving Schedules
500
C
475
450
425
Saving $5 billion
Consumption
schedule
400
375
Dissaving $5 billion
Saving
(billions of dollars)
45°
370 390 410 430 450 470 490 510 530 550
50
25
0
Dissaving Saving schedule
S
$5 billion
Saving $5 billion
370 390 410 430 450 470 490 510 530 550
Disposable income (billions of dollars)
LO1
Average Propensities
• What is not consumed is saved
• Average propensity to consume (APC)
• Fraction of total income consumed
• Average propensity to save (APS)
• Fraction of total income saved
consumption
APC =
income
APS =
APC + APS = 1
LO1
saving
income
Consumption and Saving Schedules
TABLE 10.1 Consumption and Saving Schedules (in Billions) and Propensities to Consume and Save
(4)
(1)
Level of
Output
and
Income
(GDP=DI)
(2)
Consumption
(C)
(3)
Saving
(S),
(1) – (2)
(1) $370
$375
$-5
(6)
Average
Propensity
to
Consume
(APC),
Average
Propensity
to Save
(APS),
(2)/(1)
(7)
Marginal
Propensity
to
Consume
Marginal
Propensity
to Save
(3)/(1)
(MPC),
(2)/(1)*
(MPS),
(3)/(1)*
1.01
-.01
.75
.25
1.00
.00
.75
.25
(5)
(dissaving)
(2)
390
390
0 (breakeven)
(3)
410
405
5
.99
.01
.75
.25
(4)
430
420
10
.98
.02
.75
.25
(5)
450
435
15
.97
.03
.75
.25
(6)
470
450
20
.96
.04
.75
.25
(7)
490
465
25
.95
.05
.75
.25
(8)
510
480
30
.94
.06
.75
.25
(9)
530
495
35
.93
.07
.75
.25
(10) 550
510
40
.93
.07
.75
.25
LO1
Marginal Propensities
• Marginal propensity to consume (MPC)
• Proportion of a change in income
•
consumed
Marginal propensity to save (MPS)
• Proportion of a change in income
saved
MPC =
change in consumption
change in income
MPS =
MPC + MPS = 1
LO1
change in saving
change in income
Consumption and Saving Schedules
TABLE 10.1 Consumption and Saving Schedules (in Billions) and Propensities to Consume and Save
(4)
(1)
Level of
Output
and
Income
(GDP=DI)
(2)
Consumption
(C)
(3)
Saving
(S),
(1) – (2)
(1) $370
$375
$-5
(6)
Average
Propensity
to
Consume
(APC),
Average
Propensity
to Save
(APS),
(2)/(1)
(7)
Marginal
Propensity
to
Consume
Marginal
Propensity
to Save
(3)/(1)
(MPC),
(2)/(1)*
(MPS),
(3)/(1)*
1.01
-.01
.75
.25
1.00
.00
.75
.25
(5)
(dissaving)
(2)
390
390
0 (breakeven)
(3)
410
405
5
.99
.01
.75
.25
(4)
430
420
10
.98
.02
.75
.25
(5)
450
435
15
.97
.03
.75
.25
(6)
470
450
20
.96
.04
.75
.25
(7)
490
465
25
.95
.05
.75
.25
(8)
510
480
30
.94
.06
.75
.25
(9)
530
495
35
.93
.07
.75
.25
(10) 550
510
40
.93
.07
.75
.25
LO1
Marginal Propensities
C
= .75
Consumption
15
MPC = 20
C ($15)
Saving
DI ($20)
MPS =
S
5
20 = .25
S ($5)
DI ($20)
LO1
LO1
Disposable income
Interest Rate – Investment Relationship
LO4
Investment Decision
• Marginal-benefit/Marginal-cost Decision
• Marginal-benefit from investment
– = expected rate of return
• Marginal-cost
– = interest rate paid on borrowed funds
LO4
Interest Rate and Investment
• Guided by profit motive
• Expected rate of return (r)
– = Expected profit / Cost
• Real interest rate (i)
– Interest cost of investment
• = interest rate x $ borrowed
• Invest as long as r ≥ i
LO4
Instability of Investment
• Variability of expectations
• Durability
• Irregularity of innovation
• Variability of profits
LO4
Instability of Investment
LO4