Download Loanable Funds

Saving investment spending
And financial system

Savings and Investment Spending Identity
 Saving and investment spending are always equal
for the economy as a whole.
▪ GDP =C+I+G+X-IM = Y or Expenditure = Income.
 Closed economy No net exports
▪ GDP = C + G + I
▪ Total income = Total spending
▪ What can we do with income?
▪ Spend or save.
▪ GDP = C + S or
 GDP = Consumption spending (C+G) + savings (S)
▪ If that is the case
▪ Consumer spending (C) + Government spending (G) + Investment
spending (I) should = Consumer spending (C) + Government
spending (G) + savings (S)
▪ Or C+G+I = C+G+S
▪ So Savings (S) = Investment (I)

Remember Not just households save.
 Government can save as well
 Government savings = Tax revenue (T) –
Government consumption (G) – transfer
payments (TR)
▪ Budget deficit – Government savings is negative. We are
spending more than receiving in Taxes. (dissavings)
▪ Budget surplus – Government savings is positive. We are
spending less than we are receiving in Taxes.
▪ Balanced Budget – Government savings is 0

National saving
 Private savings + Government savings
 So we can say
▪ National savings = investment (I)

The savings Investment spending identity
changes in an Open economy.
 Open economy
▪ Allows money , and goods and services to flow between
nations.
▪ Foreign Saving can be used in domestic investments (Inflows)
▪ Domestic saving can be used in foreign investments (outflows)
▪ Net capital inflows
▪ Is the total inflow of funds into a country minus the total outflow
of funds out of a country

Net capital inflows can be negative
 You can also say Net capital inflow (NCI)= Imports
(IM) – exports (X)
▪
▪
▪
▪
NCI = Imports-exports
I = (GDP- C- G) + (IM – X)
I = NATIONAL SAVINGS + (IM- X)
I = NATIONAL SAVINGS + NCI
S= Supply of loanable funds: comes from those
who are savers.
National Savings = Private savings + Government
Savings + Net capital inflows
r
Quantity of loanable funds = investment

Shift in supply for loanable funds
 Changes in private savings behavior
▪ Private savings increase shift to right
▪ Private savings decrease shift to the left
 Changes in net capital inflows
▪ Net capital inflows increase shift to the right
▪ Net capital inflows decrease shift to the left.
 Changes in government borrowing needs.
▪ Can shift either the Demand curve or the supply curve for loanable
funds
▪ Government greater demands for loans can shift
 Demand to the right
 Supply to the left
▪ Government less need for loans can shift
 Demand left
 Or supply right
r=
Real interest rate
• Demand = D demand for loans :originates from
those who want loans.
• To want a loan one looks at Rate of return.
• IF Rate of Return > real Interest rate. One is
willing to borrow.
• If Rate of Return < real interest rate one is
willing to save
Quantity of loanable funds = investment

Shifts in the Demand for loanable funds
 Changes in perceived business opportunities
▪ Changes about belief of payoffs from investments
▪ Greater payoffs shift to the right
▪ Smaller payoffs shift to the left
 Changes in government borrowing
▪ Government running at a deficit will have a greater
demand of loanable funds. Shift to the right
▪ Government running at a surplus will have no need to go
to loanable funds market. Shift to the left

When Interest Rates rise Consumers and
Business Save more than they spend.
 Greater incentive to Save then to spend.
 Earn greater future purchasing power then
investing in new projects.

So When government’s need for loans pushes
interest rates higher “crowding out” occurs.
 Demand for loans from business and individuals
decrease .