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This chapter focuses on saving, wealth and capital formation. Specifically, it looks at the ways in which saving and wealth are measured, discusses two theories of saving, and provides an overview of investment decisions. It also develops a supply and demand model of financial markets. | Saving, Capital Formation, and Financial Markets Chapter 19 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. Learning Objectives Explain the relationship between savings and wealth Identify and apply the components of national saving Discuss the reasons why people save Discuss the reasons why firms choose to invest in capital rather than financial assets Analyze financial markets using the tools of supply and demand Savings and Wealth Saving is current income minus spending on current needs The saving rate is saving divided by income Wealth is the value of assets minus liabilities Assets are anything of value that one owns Liabilities are the debts one owes The balance sheet is a list of an economic unit’s assets and liabilities Specific date Economic unit (business, household, etc.) Individual Balance Sheet, 1/1/14 Assets Liabilities Cash $80 Student loan $3,000 Checking account 1,200 Credit card balance 250 Shares of stock 1,000 Car (market . | Saving, Capital Formation, and Financial Markets Chapter 19 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. Learning Objectives Explain the relationship between savings and wealth Identify and apply the components of national saving Discuss the reasons why people save Discuss the reasons why firms choose to invest in capital rather than financial assets Analyze financial markets using the tools of supply and demand Savings and Wealth Saving is current income minus spending on current needs The saving rate is saving divided by income Wealth is the value of assets minus liabilities Assets are anything of value that one owns Liabilities are the debts one owes The balance sheet is a list of an economic unit’s assets and liabilities Specific date Economic unit (business, household, etc.) Individual Balance Sheet, 1/1/14 Assets Liabilities Cash $80 Student loan $3,000 Checking account 1,200 Credit card balance 250 Shares of stock 1,000 Car (market value) 3,500 Furniture (market value) 500 Total $6,280 $3,250 Net worth $3,030 Flow Values and Stock Values A flow value is defined per unit of time Income ■ Spending Saving ■ Wage A stock value is defined at a point in time Wealth ■ Debt The flow of savings causes the stock of wealth to change Every dollar a person saves adds to his wealth A high rate of saving today leads to an improved standard of living in the future Capital Gains and Losses Wealth changes when the value of your assets change Capital gains increase the value of existing assets Higher value for stock Capital losses decreases the value of existing assets Car accident damages bumper and front headlight Change in wealth = Saving + Capital gains – Capital losses US Stock Prices, 1960 - 2004 The Bull Market of the 1990s Stock ownership increased Direct purchases Mutual funds Pension and retirement funds Stock prices rose rapidly Capital gains on stocks increased household wealth May have decreased household savings Stock .
