CLASS #4: SAVINGS, WEALTH, AND THE CURRENT ACCOUNT

(Ch. 2 and 5) Is Income enough to assess the well-being of a household? of a nation? Wealth! What does wealth ultimately depend upon? Saving! the rate of accumulation of wealth STOCK (balance sheet: measured at a point in time) FLOW (income statement: measured per unit of time)

• Private Saving

private saving = private disposable income - consumption

S_p=(Y+NFP-T+TR+INT)-C

• Government Saving
  
  S_g=(T-TR-INT)-G
  
  

Budget deficits or surpluses

• National Saving
  
  $$\begin{eqnarray*}S=S_p+S_g \\ \ =Y+NFP-C-G \\ \ =GNP-C-G \end{eqnarray*}$$
  
  

What can you do with what you save?

Either you invest it... or you lend it to someone else!

$$\begin{eqnarray*}S &=& NFP+(Y-C-G) \\ &=& NFP+(I+NX) \\ &=&I+(NX+NFP) \\ &=&I+CA \end{eqnarray*}$$

Uses-of-saving identity:

S_p=I-S_g+CA

Twin Deficits!

Balance of Payment Accounting:
THE CURRENT ACCOUNT (CA)

Export of Goods and Services
- Import of Goods and Services
= Net Export (NX or Trade Balance)
+ Net Factor Payment (NFP)
+ Net Unilateral Transfers

Balance of Payment Accounting:
THE CAPITAL ACCOUNT (KA)

Increase in foreign-owned assets in Mexico
- Increase in Mexican-owned assets abroad
+ Increase in foreign official reserve assets in Pesos
- Increase in Mexican official reserve assets

• In each period the CURRENT ACCOUNT and the CAPITAL ACCOUNT must sum to zero:
  
  CA+KA=0
  
  

• The Balance of Payment is equal to the change in official reserves by the government:
  Increase in foreign-owned assets in Mexico
  - Increase in Mexican-owned assets abroad
  +CA
  = Balance of Payments (Official Settlements Assets)
  = Net increase in official reserve assets

NATIONAL WEALTH

may change because of:

• Current Account deficits or surpluses (saving)
• Change in the value of Existing Assets

FINANCIAL CRISES (a first hint)

• Symptoms: Country Indebtness, Current Account deficits, etc.
• Remedies: Current Account surpluses (IMF), Transparent capital markets

What have we got?

• difference between stocks and flows
• understand that Current Account surplus is just the other side of the coin of a deficit in the Capital Account (the country is exporting capital, thereby accumulating wealth)
• financial crises