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Sem 5 Prep
← Money & BankingSaving, investment and the financial system

Formulas for this chapter

Private saving

Private saving = Y - T - C

When the question gives income, taxes and consumption. If it gives a deficit or surplus instead of taxes, get T out of that first.

Y
National income or GDP for the period
T
Tax revenue collected by the government
C
Household consumption spending

Public saving, surplus and deficit

Public saving = T - G Budget surplus = T - G Budget deficit = G - T = -(public saving)

Whenever the question mentions a surplus or a deficit. Convert it to public saving with the correct sign before using it anywhere else.

T
Tax revenue
G
Government purchases of goods and services

National saving

National saving = private + public = (Y - T - C) + (T - G) = Y - C - G

The short form Y − C − G is fastest, and it never needs taxes. Use the long form as the cross-check.

Y
National income or GDP
C
Household consumption
G
Government purchases

National income accounting identity

Y = C + I + G + NX Closed economy: Y = C + I + G, so I = Y - C - G Open economy: I = Y - C - G - NX

Read the question for the word closed. If the economy is open or NX is given, the closed-economy shortcut is wrong.

I
Investment, that is, spending on new capital
NX
Net exports: exports minus imports, negative for a trade deficit
Step 2 of 22
The real wordsTheory

The definition to write in the exam

Financial systemA framework which facilitates efficient flow of funds from saving to investment by bringing savers and borrowers together via financial markets and financial institutions.

Four words in that sentence are doing work. Efficient: the pipe should be cheap. Saving to investment: the direction. Markets: where savers and borrowers meet directly. Institutions: banks and funds that stand in between.

Learn it verbatim. It is the opening line of half the long answers in this course.

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