lecture 8 saving investment and the financial system
TRANSCRIPT
Macroeconomics
Lecture 8
Saving, Investment, and the Financial System
Questions
Life Expectancy
http://www.worldlifeexpectan
cy.com/world-life-
Phone call
New York to Los Angeles
1915 90 hours
2016 1 second
- 99.99%
Inputs
Output
Innovation
Inputs
Output
Innovation
Innovation
Innovation
Innovation
Scarcity + Innovation
createsAbundance
Compounding (1 + r)n
r = rate n = number of periods
Grow at 10% for 5 years
(1 + r)n
(1 +.10)5
= 1.61
10% for 5 years 2% for 15 years 8% for 20 years 4% for 10 years 5% for 50 years
1.61 1.35 4.66 1.48 11.47
Saving, Investment, and the
Financial System
Key Conceptsfinancial systemfinancial marketsbondstockfinancial intermediariesmutual fund
national savingprivate savingpublic savingbudget surplusbudget deficitmarket for loanable fundscrowding out
I. O. UI Owe YouPromises
Name Amount
DateSignature
Promissory Note
Trading paper for paper
I.O. U.
10 DollarsDr. Gale
Financial System
Institutions that match people who save
money with people who need money
Financial Instruments
I.O.UsSimple to Complex
RelationshipContract
Financial System
Two categories
Financial Markets
Financial Intermediaries
Financial Markets
Bond Market
Stock Market
Financial Markets
Bonds - Borrow - Debt
Stocks - Sell OwnershipsEquity
Bond Markets
What is a Bond?
Certificate of Indebtedness
Rexburg Pizza Company
Rexburg Pizza Company
Borrowor
Sell ownership shares
Rexburg Pizza Company
Bond
100Dollars
Dr. GaleCEO
10% 2023
Pays 10 Dollars each yearPays 100 Dollars at maturity
2014Coupon
2015Coupon
2016Coupon
2017Coupon
2018Coupon
2019Coupon
2020Coupon
2021Coupon
2022Coupon
2023Coupon
Bond
Term - Length of time
Credit Risk - chance of default
Tax - How is the interest or profit taxed
Stock
Ownership ShareCompany sells once
Then resold to other buyersLimited Liability
No promises of profitEquity position
Rexburg Pizza Company
Need to raise 1,000 Dollars
Create 1,000 shares and sell for 1 Dollar each
Each share is worth 1/1,000 of the company
Rexburg Pizza Company
Stock Certificate
One Share
Dr. GaleCEO
Current Share Owner: Bill Gates
