Understanding Macroeconomic Data: Saving and Wealth

Understanding Macroeconomic Data: Saving and Wealth

Introduction

This study guide summarizes key macroeconomic concepts related to saving, wealth, and their measurement, with a focus on the Canadian context. It covers the importance of saving, how saving is measured, the relationship between saving and investment, and trends in saving rates.

Why is Saving Important?

Saving plays a crucial role in determining a nation's wealth and its ability to invest in future growth. While Gross Domestic Product (GDP) measures the flow of goods and services produced in an economy, it does not directly measure a nation's wealth, which is a stock variable.

• Wealth is the total value of assets owned by a nation at a point in time.

• National wealth depends on how much a country has saved and invested over time.

National Wealth Equation:

National Wealth	=	Domestic Capital Stock	+	Foreign Assets	-	Foreign Liabilities

Additional info: Domestic capital stock refers to the value of physical assets within the country, while foreign assets and liabilities represent the country's net international investment position.

How is Saving Measured?

Saving represents the portion of income not used for consumption or government purchases, and is available for investment in the economy. It can be divided into private saving and government saving.

• Total Saving (S): $S = S_p + S_g$

• Aggregate Saving: $S = Y + NFP - C - G$

• Where:

  • $Y$ = GDP (Gross Domestic Product)

  • $NFP$ = Net Factor Payments from abroad

  • $C$ = Consumption

  • $G$ = Government Purchases

Saving: First Perspective (By Sector)

• Private Saving ($S_p$): Disposable income not used for consumption.

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

  • Where:

    • $T$ = Taxes

    • $TR$ = Transfers received from government

    • $INT$ = Interest payments from government

• Government Saving ($S_g$): Government revenues less expenditures.

  • $S_g = T - TR - INT - G$

• Budget Surplus: When $S_g > 0$

• Budget Deficit: When $S_g < 0$

Saving: Second Perspective (Aggregate Output)

• Saving is aggregate output (income) not consumed:

  • $S = (Y + NFP) - C - G$

  • Here, $Y + NFP$ is Gross National Product (GNP).

• Using the definition of GDP:

  • $Y = C + I + G + NX$

  • So, $S = (C + I + G + NX) + NFP - C - G$

  • Simplifies to: $S = I + (NX + NFP)$

How is Private Saving Used?

Private saving finances domestic investment, the current account balance, and the government budget deficit.

• Key Equation: $S = I + (NX + NFP)$

• Current Account (CA): $CA = NX + NFP$

  • Net Exports (NX): Payments received from exports minus payments for imports.

  • Net Factor Payments (NFP): Payments received for factor services sold abroad minus payments for factor services bought from abroad.

• Current Account Surplus: When $CA > 0$

• Current Account Deficit: When $CA < 0$

Saving and Its Uses:

• $S = I + CA$

• $S = S_p + S_g$

• $S_p = I + CA - S_g$

Thus, private saving finances:

• Domestic investment ($I$)

• Current account balance ($CA$)

• Government budget deficit ($-S_g$)

Saving Rate in Canada

Is Saving Enough?

• Household Saving Rate:

  • Formula: $\text{Household saving rate} = \frac{S_h}{Y_{d,h}}$

  • $S_h$ = Household net saving

  • $Y_{d,h}$ = Household disposable income

• Household saving rates in Canada have declined substantially since the 1980s but rose dramatically during the COVID-19 pandemic.

• Private Saving Rate (Households + Firms):

  • Formula: $\frac{S_P}{Y_d} = \frac{S_h + S_f}{Y_h + Y_f}$

  • $S_f$ = Firm saving

  • $Y_f$ = Firm disposable income

• Private saving did not rise as much initially as household saving during COVID-19, but followed a similar pattern.

• National Saving Rate: $\frac{S}{Y}$ has no obvious trend.

Trends in Canadian Saving Rates

• Graphs show household and private saving rates as a percentage of national income from 1960 to 2020.

• Household saving peaked in the early 1980s, declined until the 2000s, and spiked during the COVID-19 pandemic.

• Private saving (households + firms) follows a similar but less volatile pattern.

Summary Table: Key Macroeconomic Saving Relationships

Concept	Formula	Description
Total Saving	$S = S_p + S_g$	Sum of private and government saving
Private Saving	$S_p = Y_d - C$	Disposable income not used for consumption
Government Saving	$S_g = T - TR - INT - G$	Government revenues less expenditures
Aggregate Saving	$S = Y + NFP - C - G$	Income not consumed by households or government
Saving-Investment-CA Identity	$S = I + CA$	Saving finances investment and the current account
Household Saving Rate	$\frac{S_h}{Y_{d,h}}$	Household net saving as a share of disposable income

Example: Calculating Private Saving

• Suppose: $Y = 1000$, $NFP = 20$, $T = 200$, $TR = 50$, $INT = 10$, $C = 700$

• Private saving: $S_p = (1000 + 20 - 200 + 50 + 10) - 700 = 180$

Additional info:

• Net factor payments (NFP) are often small for large economies but can be significant for countries with large foreign investments.

• Saving rates are important indicators for long-term economic growth and financial stability.