Understanding Macroeconomic Data: Saving and 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 significance of saving and wealth in macroeconomic analysis. It covers definitions, formulas, and applications relevant to national accounts and saving behavior, with a special emphasis on Canada.

Why is Saving Important?

Saving vs. Wealth

• Saving is a flow variable, representing the portion of income not spent on consumption within a given period.

• Wealth is a stock variable, representing the total value of assets owned at a point in time.

• National wealth depends on cumulative saving and investment over time.

National Wealth Formula

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

National Wealth = Domestic Capital Stock + Foreign Assets - 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:

$S = S_p + S_g$

• Saving is also defined as gross national product (GNP) less consumption and government purchases:

$S = Y + NFP - C - G$

• Y: GDP (Gross Domestic Product)

• NFP: Net Factor Payments from abroad

• C: Consumption

• G: Government Purchases

Saving Measured: First Perspective

• Saving is the sum of its parts:

$S = S_p + S_g = (S_h + S_f + S_g)$

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

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

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

$S_g = T - TR - INT - G$

• Budget Surplus: When government saving is positive

• Budget Deficit: When government saving is negative

Saving Measured: Second Perspective

• Saving as aggregate output (income) not consumed:

$S = (Y + NFP) - C - G$

• Where $Y$ is GDP and $NFP$ is net factor payments, together forming GNP.

Using the definition of GDP:

$GDP = C + I + G + NX$

So,

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

Simplifies to:

$S = I + (NX + NFP)$

• This formula shows how saving is used for investment and net payments with the rest of the world.

How is Private Saving Used?

Current Account and Saving

• The 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.

$S = I + (NX + NFP)$

Or,

$S = I + CA$

• Current Account Surplus: When CA > 0, the country is a net lender to the rest of the world.

• Current Account Deficit: When CA < 0, the country is a net borrower.

Saving and National Finances

• Private saving finances:

  • Domestic investment ($I$)

  • Current account balance ($CA$)

  • Government budget deficit ($-S_g$)

$S_p = I + CA - S_g$

Saving Rate in Canada

Is Saving Rate High Enough?

• Household Saving Rate:

$\text{Household saving rate} = \frac{S_h}{Y_{h}}$

• Where $S_h$ is household net saving and $Y_h$ is household disposable income.

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

Private Saving Rate (Households + Firms)

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

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

• National saving rate, $\frac{S}{Y}$, has no obvious trend.

Empirical Data: Saving in Canada

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

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

Key Formulas Summary

Concept	Formula (LaTeX)	Description
Aggregate Saving	$S = S_p + S_g$	Sum of private and government saving
Private Saving	$S_p = Y_d - C = (Y + NFP - T + TR + INT) - C$	Disposable income not used for consumption
Government Saving	$S_g = T - TR - INT - G$	Government revenues less expenditures
Saving (GNP perspective)	$S = (Y + NFP) - C - G$	Aggregate output not consumed
Saving (GDP definition)	$S = I + (NX + NFP)$	Saving used for investment and net payments abroad
Household Saving Rate	$\frac{S_h}{Y_h}$	Household net saving over disposable income
Private Saving Rate	$\frac{S_P}{Y_d} = \frac{S_h + S_f}{Y_h + Y_f}$	Private saving over private disposable income

Conclusion

Understanding saving and wealth is fundamental in macroeconomics, as it informs investment, government policy, and international financial positions. The measurement and use of saving, as well as trends in saving rates, are crucial for analyzing economic health and forecasting future growth.