Lecture macroeconomics chapter 2 2 savings, investment and financial system

Institute of International Education 2 2 Saving, Investment and Financial System Robinson Crusoe economy Institute of International Education Saving of Robinson ▪ Robinson lives alone and makes a livi[.]

2.2 Saving, Investment and

Financial System

Robinson Crusoe economy

Saving of Robinson

• Notice that Robinson is the producer AND the

consumer; or, in other word, he is the firm AND the

all the fish he catches, or eat part of it and store the rest – but Robinson Saves!

Now to be more realistic

In the real world, capital depreciates

non-storable, can Robinson save?

Yes, he can … but not alone

Suppose there are 2 Robinson

Robinson 1 Robinson 2

Two Robinsons can make arrangement

and Robinson 1 makes the promise that he will

return the fish back once he recovers and fishes

again

Robinson 2 is the saver

▪ The income of the saver goes to the borrower.

Two Robinsons can make arrangement

to catch more fish in the future;

him; and Robinson 1 promises that he will give the fish back

Robinson 1 is the investor

▪ The investment is financed by saving!

When there are only two Robinsons

saving through FINANCIAL INSTITUTIONS

When there are millions of people as

in the real world…

Financial system

▪ The financial system: consists of the institutions that help match the saving of one person with the investment of another

financial institutions which can be grouped into 2 categories:

- Financial markets

- Financial intermediaries

Financial Institutions

▪ Financial markets: institutions through which

savers can directly provide funds to borrowers

A stock is a claim to partial ownership in a firm

Financial Institutions

▪ The Bond Market: How Bond works?

• Issue Bond

• Regular interest

payment to

investors

• Repay principal

at maturity date

Buy bond and lend money to the issuer

Government/

Corporations

Financial Institutions

▪ The Stock Market: How Stock works?

Another way for raising funds is to sell stock in the

company Stock represents ownership in a firm and

is a claim to the profits that the firm makes

Companies receives money from investors

Companies issue

stock to raise capital

Companies use funds raised

to generate more profit

Companies give their shareholders profit