Chapter 7

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 What is capital formation?

Process of constructing real property,

manufacturing producers' durable equipment
increasing business inventories.
 Describe the major components of the
gross domestic product.

Personal consumption expenditures; (C)

Government expenditures, including gross investment; (E)
Gross private; domestic investment (I)
Net exports of goods and services(NE)

● GDP= C + E + I +/- NE
Identify the major components of net
saving and describe their relative
contributions in recent years.

Net private saving (primarily personal saving and undistributed corporate profits) and
net government saving (federal, and state and local).

2015 = $484.4 billion & 2008 = -$23 billion.

 Identify the various sources of
revenues in the federal budget.

Personal income taxes; social security and other retirement taxes;

borrowing to cover deficit;
corporate income taxes;
excise, estate, and other taxes
Identify the major expense categories
in the federal budget.

● Social security, Medicare, and other retirement;

● National defense, veterans, and foreign affairs;
● Social programs (including Medicaid);
● Physical, human, and community development
● Net interest on the debt;
● Law enforcement and general government
 Compare savings surplus and savings
deficit units. Indicate which economic units
are generally of one type or the other.

Savings surplus unit is an economic unit that generates savings;

Savings deficit unit is an economic unit with income less than its expenses, taxes, and real asset investments,
making it necessary to acquire funds from a savings surplus unit
 Define personal savings.

Savings of individuals equal to personal income less personal current taxes less personal outlays

PS= PI- PT- PO

 Difference between voluntary and
contractual savings.

Voluntary savings are savings in the form of financial assets held for use in the future;

Contractual savings are savings accumulated on a regular schedule for a specified length of time by prior
agreement
 How and why do
corporations save?

By paying dividends against their after-tax profits; to meet planned spending in the future
 Describe the principal factors that
influence the level of savings by
individuals.
Levels of income, economic expectations, cyclical influences, life stage of the individual saver or
corporation.
 What are the life cycle stages
of individuals?
● Formative/education developing,
● career starting/family creating,
● wealth building,
● retirement enjoying
 How does each life cycle stage relate to
the amount and type of individual
savings?
● Formative/education developing = little income produced;
● Career starting/family creating = possess little savings but have large "earning power" potential;
● Wealth building = income is much higher and the expense of raising and educating children has been
reduced or eliminated;
● Retirement enjoying = income is sharply reduced
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What are the life cycle stages of corporations and other business firms?
● Start-up stage, survival stage, rapid growth stage, maturity stage

What are the two types of financial market securities?

● Capital market and money market
 Identify and briefly describe the major
securities that are originated or traded in
capital securities markets.
● Mortgages,
● treasury notes/bonds,
● municipal bonds,
● corporate bonds,
● corporate stocks
What is a mortgage? What is meant
by the term mortgage markets?

Mortgage is a loan secured by real property in the form of buildings and houses;
Mortgage markets in which mortgage loans are created to purchase buildings and houses and are
originated in primary markets and traded in secondary markets.
Identify and briefly describe the two
major types of residential real estate
mortgages.
Fixed-rate mortgage = fixed interest rate and constant periodic payment over the real estate loan's life;
Adjustable-rate mortgage (ARM) = interest rate and periodic payments that vary with market interest
rates over the real estate loan's life
 What is meant by the term
securitization?
Process of pooling or packaging mortgage loans into debt securities
 What is a mortgage-backed
security?
Debt security created by pooling together a group of mortgage loans
 Credit rating and Credit score

● A credit rating measures the ability of a business or government to repay its financial
obligations by looking at its history of borrowing and repaying loans.

● A credit score does the same, but measures individuals (and in some cases, small
businesses).
 GDP= C + E + I + NE

1. A very small country’s gross domestic product is $12 million.

a. If government expenditures amount to $7.5 million and gross private domestic investment is $5.5 million,
what would be the amount of net exports of goods and services?
b. How would your answer change in Problem 1 if the gross domestic product had been $14 million?

a) GDP= C + E + I + NE
12=7.5+5.5+x so it must be -1 million(I>E)

b) 14=7.5+5.5+x so positive 1m
X=14-7.5-5.5=1 (E>I)
 DPI=PI-PCT
PS=DPI-PO
2. Personal income amounted to $17 million last year. Personal current taxes amounted to $4 million and
personal outlays for consumption expenditures, nonmortgage interest, and so forth were $12 million.
a. What was the amount of disposable personal income last year?
b. What was the amount of personal saving last year?
c. Calculate personal saving as a percentage of disposable personal income.

A) Disposable personal income (DPI) = personal income – personal current taxes

DPI = $17 million - $4 million = $13 million

B) Personal savings (PS) = disposable personal income – personal outlays

PS = $13 million - $12 million = $1 million

C) Savings rate = $1 million/$13 million = 7.7%

3. Assume personal income was $28 million last year. Personal outlays were $20 million and personal current taxes
were $5 million.

a. What was the amount of disposable personal income last year?

b. What was the amount of personal saving last year?
c. Calculate personal saving as a percentage of disposable income

A)Disposable personal Income(DPI) =personal income -personal taxes DPI =28-5 =$23M
B) Personal savings(PS)=DPI-PO PS =23-20 =$
C) personal saving rate = (3M/23M )*100 =13.04%
 GDP= C + E + I +/-NE

4. A nation’s gross domestic product is $600 million. Its personal consumption expenditures are $350
million, and government expenditures are $100 million. Net exports of goods and services amount to
$50 million.
a. Determine the nation’s gross private domestic investment.
b. If imports exceed exports by $25 million, how would your answer to (a) change?

A) 600 = 350+ 100 + X+ 50

private domestic investment = 600 - 350-100-50 = 100

B) 600= 350+100+X - 25
Private domestic investment = 600 - 350- 100 + 25 = 175
 FC and HC
FC=1$/HC
5. A nation’s gross domestic product is stated in U.S. dollars at $40 million.

a. The dollar value of one unit of the nation’s currency (FC) is $0.25. Determine the value of GDP in FCs.
b. How would your answer change if the dollar value of one FC increases to $0.30

a. Value of GDP in FCs = 40/0.25 = 160 Million FC

b. Value of GDP in FCs = 40/0.30 = 133.33 Million F
 Thanks!
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