Chapter 6 Saving and Investment Consumption and GDP

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Chapter 6 Saving and Investment

Chapter 6 Saving and Investment

Consumption and GDP in the United States Percentage deviation from trend Panel A 20

Consumption and GDP in the United States Percentage deviation from trend Panel A 20 10 0 -10 -20 Figure 6. 1 A 1955’ 60 ’ 65 ’ 70 ’ 75 ’ 80 ’ 85 ’ 90 Time GDP Consumption 2 © 1999 South-Western College Publishing

© 1999 South-Western College Publishing Investment and GDP in the United States Percentage deviation

© 1999 South-Western College Publishing Investment and GDP in the United States Percentage deviation from trend Panel B 20 10 0 -10 -20 Figure 6. 1 B 1955 ’ 60 ’ 65 ’ 70 ’ 75 ’ 80 ’ 85 ’ 90 Time GDP Investment 3

How Smooth is Consumption? GDP Consumption Investment Standard Deviation 2. 58 Standard Deviation relative

How Smooth is Consumption? GDP Consumption Investment Standard Deviation 2. 58 Standard Deviation relative to GDP 1. 00 0. 76 3. 34 Table 6. 1 4 © 1999 South-Western College Publishing

Future Income The Intertemporal Production Possibilities Set D E A B O Investment Figure

Future Income The Intertemporal Production Possibilities Set D E A B O Investment Figure 6. 2 Consumption Current Income 5 © 1999 South-Western College Publishing

Y (Value of commodities produced tomorrow) Maximizing Profits Y 1 3 2 1 O

Y (Value of commodities produced tomorrow) Maximizing Profits Y 1 3 2 1 O Figure 6. 3 I 1 Investment I (Investment today) 6 © 1999 South-Western College Publishing

Y (Output) Deriving the Investment Demand Curve Panel A Slope (1 + r. A)

Y (Output) Deriving the Investment Demand Curve Panel A Slope (1 + r. A) YA A A O Figure 6. 4 A IA I (Investment) 7 © 1999 South-Western College Publishing

Y (Output) Deriving the Investment Demand Curve Panel B Slope (1 + r. B)

Y (Output) Deriving the Investment Demand Curve Panel B Slope (1 + r. B) YB B O Figure 6. 4 B B IB I (Investment) 8 © 1999 South-Western College Publishing

r (Real estate interest) Deriving the Investment Demand Curve Panel C r. A Investment

r (Real estate interest) Deriving the Investment Demand Curve Panel C r. A Investment demand curve r. B 0 Figure 6. 4 C IA IB I (Investment) 9 © 1999 South-Western College Publishing

Future consumption Maximizing Utility Over Time U 3 U 2 A C 2 E

Future consumption Maximizing Utility Over Time U 3 U 2 A C 2 E U 1 Y 2 C 1 Y 1 (1+r) Consumption Saving (Y 1 - C 1) Figure 6. 5 Present consumption 10 © 1999 South-Western College Publishing

Future consumption Deriving the Saving Supply Curve Panel A A E Y 2 Slope

Future consumption Deriving the Saving Supply Curve Panel A A E Y 2 Slope (1 + r. A) SA Figure 6. 6 A Y 1 Present consumption 11 © 1999 South-Western College Publishing

Future consumption Deriving the Saving Supply Curve Panel B B E Y 2 Slope

Future consumption Deriving the Saving Supply Curve Panel B B E Y 2 Slope (1 + r. B) SB Figure 6. 6 B Y 1 Present consumption 12 © 1999 South-Western College Publishing

r (Real interest rate) Deriving the Saving Supply Curve Panel C r. B r.

r (Real interest rate) Deriving the Saving Supply Curve Panel C r. B r. A 0 Figure 6. 6 C SA SB Saving 13 © 1999 South-Western College Publishing

r (Real interest rate) Saving and Investment in a Closed Economy Saving supply curve

r (Real interest rate) Saving and Investment in a Closed Economy Saving supply curve r. E r 1 S 1 0 Figure 6. 7 Investment demand curve I 1 IE = S E Saving and investment 14 © 1999 South-Western College Publishing

Productivity and the Investment Demand Curve Panel A Production function 2 Output Y 2

Productivity and the Investment Demand Curve Panel A Production function 2 Output Y 2 Production function 1 Y 1 Slope (1 + r 1) O Figure 6. 8 A I 1(r 1) I 2(r 1) Investment 15 © 1999 South-Western College Publishing

r (Real interest rate) Productivity and Investment Demand Panel B Saving supply curve r

r (Real interest rate) Productivity and Investment Demand Panel B Saving supply curve r 2 r 1 0 Figure 6. 8 B Investment demand curve 2 Investment demand curve 1 I 1 (r 1) I 2 (r 2) I 1 (r 1) Saving and investment 16 © 1999 South-Western College Publishing

r (Real interest rate) Saving and the Baby Boom Panel A Saving supply in

r (Real interest rate) Saving and the Baby Boom Panel A Saving supply in 1939 r 1 r 2 0 Box 6. 2 A Saving supply in 1970 Investment demand I 1 I 2 Saving and investment 17 © 1999 South-Western College Publishing

r (Real interest rate) Saving and the Baby Boom Panel B Saving supply curve

r (Real interest rate) Saving and the Baby Boom Panel B Saving supply curve in 2020 r 1 r 2 0 Box 6. 2 B Saving supply curve in 1990 Investment demand curve I 1 I 2 Saving and investment 18 © 1999 South-Western College Publishing

© 1999 South-Western College Publishing Government Debt and Pension Liabilities as Percent of GDP

© 1999 South-Western College Publishing Government Debt and Pension Liabilities as Percent of GDP in 1990 Net Conventional Debt Net Pension Liabilities Canada 52 121 Germany 22 157 100 259 United Kingdom 27 156 United States 35 90 Italy Source: Max Alier, Essays on pension reform, Ph. D. thesis, UCLA, 1997. Table 6. 3 19

r (Real interest rate) Saving and Investment in an Open Economy Panel A Saving

r (Real interest rate) Saving and Investment in an Open Economy Panel A Saving supply curve r 2 r 1 0 Investment demand curve S 1 TOT I 2 TOT S 2 TOT I 1 TOT NB 2 < 0 NB 1 > 0 Domestic Saving and investment Figure 6. 9 A 20 © 1999 South-Western College Publishing

r (World real interest rate) Saving and Investment in an Open Economy Panel B

r (World real interest rate) Saving and Investment in an Open Economy Panel B B r 2 E r r 1 NB 2 O World supply of capital to the U. S. C U. S. demand for capital from the world A NBE NB 1 Quantities of capital demanded and supplied Figure 6. 9 B 21 © 1999 South-Western College Publishing

Percentage of GDP © 1999 South-Western College Publishing Budget Deficit and Trade Surplus Panel

Percentage of GDP © 1999 South-Western College Publishing Budget Deficit and Trade Surplus Panel A 10 8 6 4 2 0 -2 -4 -6 1970 ’ 73 ’ 76 ’ 79 ’ 82 ’ 85 ’ 88 ’ 91 ’ 94 Figure 6. 10 A Real interest rate Trade surplus Budget deficit 22

r(World real interest rate) Panel B r. A B A World supply of capital

r(World real interest rate) Panel B r. A B A World supply of capital to the U. S. demand for capital 2 U. S. demand for capital 1 0 NBA NBB Quantities of capital demanded and supplied Figure 6. 10 B 23 © 1999 South-Western College Publishing

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