Transcript Saving, Investment, and the Financial System

Chapter 13
Saving, Investment, and the
Financial System
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Outline
Coordination of savings and investment
by the economy
 Working of the financial system and its
constitution
 Develop a model of supply and demand
for funds
 Impact of government policies on
interest rate
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Financial System in Canada
 Financial system is a group of
institutions in the economy that help to
match one person’s saving with
another person’s investment.
 It is made up of a number of financial
institutions. Broadly of two types
 Financial markets
 Financial Intermediaries
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Financial Markets
 Financial markets are institutions through
which savers can directly provide funds to
borrowers
 The bond market
 The stock market
 The bond is a certificate of indebtedness
and has two important characteristics
 Term of the bond (date of maturity)
 Credit risk- probability of default by the
borrower
 Tax assessment: Interest rate on most bonds
is subject to a tax
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Financial Markets
 The stock market: Stock is a claim to partial
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ownership of firm and issue of stock is done
through sale of shares to the public
Equity finance versus debt finance
The prices at which shares trade on stock
exchange are determined by the supply and
demand for the stock in the company
Equity premium- bonus paid by the market
to shareholders
Stock index is the average of a group of
stock prices
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Financial Intermediaries
 Financial intermediaries are financial
institutions through which savers ca
indirectly provide funds to borrowers
 Banks
 Mutual funds
 Banks help create a special asset
(cheques against deposits) that functions
as a medium of exchange
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Financial Intermediaries
 Mutual fund is an institution that sells
shares to the public and uses the
proceeds to buy a portfolio of stocks and
bonds
 The shareholder of the mutual fund
accepts the risks and returns associated
with the mutual fund
 Helps small savers to diversify risk
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Reading the Newspaper’s stock
tables
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Reading an online Quote
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S and I in the National Income
Accounts
 S and I are important determinants of LR
growth in GDP and standards of living of
a nation
 Recall: Y = C + I + G + NX
 Assume a closed economy
 There are two components to national
saving:
 Public saving
 Private saving
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S and I in the National Income
Accounts
 For the economy as a whole, saving must
be equal to investment
 The concept and calculation of Present
Value
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The Market For Loanable Funds
 Financial markets co-ordinate the
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economy’s saving and investment in the
Loanable Funds Market
Saving represents the supply of loanable
funds
Investment represents demand for
loanable funds
The supply and demand for loanable
funds depends on the real interest rate
Equilibrium determines the real interest
rate in the economy
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Government Policy and Economy’s
Saving and Investment
 Policies that influence the loanable funds
market:
 Tax incentives and Saving
 Tax incentives that encourage savings would
result in lower interest rates and greater
investment
 Tax credits and Investment
 Tax credits that encourage investment would
result in higher interest rates and greater saving
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 Government Budget Deficits/Surpluses
Government Policy and Economy’s
Saving and Investment
 Government Budget Deficits
 Impacts adversely on national saving
 Government borrowing crowds out private
investment
 Budget deficits and vicious circle
 Budget surplus and virtuous circle
 Accumulation of government debt in Canada
 Policies undertaken by the federal and provincial
governments
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FEDERAL GOVT: BUDGET SURPLUS and BUDGET DEFICIT
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PROVINCIAL GOVT: BUDGET SURPLUS and BUDGET DEFICIT
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Savings and Investment in Canada as % of GDP 1961-2001
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