IntMkt 04

							Integrated Markets
      Part IV
   Feldstein-Horioka
      Saving = Investment
 Elementary   macroeconomics tells
  us that the above must be true
 More advanced economics keeps
  this equality but modifies it with
  realistic additives like the current
  account and the government
  budget (Ex – Im and G – T)
      Digression on Why
 Advanced   macroeconomics
  presents the elementary I = S
  as the more complicated
 I + G + Ex = S + T + Im
 Consumers (general public)
  may produce all of GDP, but
  they purchase only about 2/3
          First I + G + Ex
 These are non-consumer
 components of total demand:
 investors (businesses) buying
 their machines & other items;
 the government buying its
 energy, education,
 infrastructure; foreigners
 buying our exports
         Now S + T + Im
 This is a supply concept
 The three terms add up to be
  components of GDP not purchased
  by consumers
 But consumers (general public)
  produced these components
 By not purchasing them, they
  “supply” these goods for others
         In Other Words
 GDP   = Gross Earned Income = C +
  S + T + Im
 C is spent on consumption
 S + T + Im is money not spent
  (goods not purchased), but the
  money goes to financial
  institutions, the government and to
  foreigners
              Finally
 Financial  institutions lend the
  money to consumers, the
  government & business
 The government transforms its
  share (T) into spending (G)
 Foreigners use the money to
  spend or invest in our country (Ex
  or capital inflow)
       Saving  Investment
 In a relatively closed economy,
  S & I normally rise & fall
  together: S  I
 In an open economy, this link is
  broken: S  I
 Big saving countries lend to
  low savers
    Some Macroeconomics
 S – I = G – T + Ex – Im
 = G – T + CA
 = G – T – KA
 So, S + KA – I = G – T
 Whatever fiscal policy may be (G – T),
  saving & investment are separated by
  capital account
       S + KA – I = G – T
 If G – T  0, a low saving country
  with good investment possibilities
  will have a capital inflow (KA > 0)
 If G – T is large & positive (deficit),
  KA will be correspondingly large &
  positive (USA)
 Japan? Vietnam? Korea?
          Final Note
 These   four market standards
  actually fail to indicate much
  integration beyond the fairly
  tight relationship between USA
  and Japan
 Not even USA & most European
  countries