Understanding Macroeconomic Data: Saving & Wealth in Macroeconomic Theory

Understanding Macroeconomic Data: Saving & Wealth

Introduction

This study guide summarizes key concepts from Macroeconomic Theory I (ECON 222), focusing on the measurement and importance of saving and wealth in macroeconomics, with applications to the Canadian economy.

Why is Saving Important?

Saving vs. Wealth

Saving is a flow variable that represents the portion of income not spent on consumption. In contrast, wealth is a stock variable that measures the total value of assets owned at a point in time.

• Saving does not measure a nation's wealth directly, but contributes to its accumulation over time.

• National wealth depends on how much a country has saved and invested in both domestic and foreign assets.

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

Formula:

$ext{National Wealth} = ext{Domestic Capital Stock} + ext{Foreign Assets} - ext{Foreign Liabilities}$

How is Saving Measured?

Aggregate Saving

Saving is the portion of national income available for investment in the economy. It consists of private saving and government saving.

• Total Saving: $S = S_p + S_g$

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

• Where:

  • $Y$ = GDP (Gross Domestic Product)

  • $NFP$ = Net Factor Payments from abroad

  • $C$ = Consumption

  • $G$ = Government Purchases

First Perspective: Components of Saving

• Private Saving ($S_p$): Disposable income not used for consumption. $S_p = Y_d - C = (Y + NFP - T + TR + INT) - C$

  • $T$ = Taxes

  • $TR$ = Transfers

  • $INT$ = Interest payments

• Government Saving ($S_g$): Government revenues less government expenditures. $S_g = T - TR - INT - G$

• Total Saving: $S = S_p + S_g = (S_h + S_f + S_g)$ Additional info: $S_h$ = Household saving, $S_f$ = Firm saving

Budget Surplus and Deficit

• Budget Surplus: When government revenues exceed expenditures.

• Budget Deficit: When government expenditures exceed revenues.

Second Perspective: Output Not Consumed

• Saving is aggregate output (income) not consumed: $S = (Y + NFP) - C - G$

• Using the definition of GDP: $GDP = C + I + G + NX$ $S = (C + I + G + NX) + NFP - C - G$

• Simplifying: $S = I + (NX + NFP)$

• Where:

  • $I$ = Investment

  • $NX$ = Net Exports

How is Private Saving Used?

Saving and the Current Account

• Current Account (CA): Records net payments with the rest of the world.

• 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	Current Account Deficit
Exports + NFP > Imports	Imports > Exports + NFP

Formula:

$S = I + CA$

• Private Saving: $S_p = I + CA - S_g$

• Saving finances:

  • Investment ($I$)

  • Current account balance ($CA$)

  • Government budget deficit ($-S_g$)

Saving Rate in Canada

Is Saving Rate High Enough?

• Household Saving Rate: $\text{Household Saving Rate} = \frac{S_h}{Y_{h}}$ Where $S_h$ = Household net saving, $Y_h$ = Household disposable income

• Household saving rate has declined substantially since the 1980s but rose dramatically during COVID-19.

• Private Saving Rate (households + firms): $\frac{S_P}{Y_d} = \frac{S_h + S_f}{Y_h + Y_f}$ Where $S_f$ = Firm saving, $Y_f$ = Firm disposable income

• Private saving rate followed a similar pattern to household saving rate.

• National Saving Rate: $\frac{S}{Y}$ No obvious trend in recent decades.

Empirical Data: Saving in Canada

• Graphs show household and private saving rates as a percentage of national income from 1965 to 2020.

• Sharp increase in saving rates during economic shocks (e.g., COVID-19).

Key Formulas for Canada

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

Summary Table: Saving Concepts

Term	Definition	Formula
Private Saving ($S_p$)	Disposable income not used for consumption	$S_p = Y_d - C$
Government Saving ($S_g$)	Government revenues less expenditures	$S_g = T - TR - INT - G$
Total Saving ($S$)	Sum of private and government saving	$S = S_p + S_g$
National Wealth	Stock of assets minus liabilities	$ext{Domestic Capital Stock} + ext{Foreign Assets} - ext{Foreign Liabilities}$
Current Account ($CA$)	Net payments with rest of world	$CA = NX + NFP$

Conclusion

Understanding saving and wealth is crucial for analyzing macroeconomic performance. Saving rates affect investment, current account balances, and ultimately the accumulation of national wealth. Empirical data from Canada illustrates the dynamics of saving rates over time and their response to economic events.

Additional info: Where formulas or terms were abbreviated or unclear, standard macroeconomic definitions and notation were used for completeness.