Econ 202 1st Edition Lecture 18Outline of Last Lecture I. Human capitalII. Technology and productivityOutline of Current Lecture I. The relationship between savings and investment spending II. Aspects of the loanable funds market, which shows how savers are matched with borrowersIII. The need for a sound financial systemCurrent LectureI. The Necessity of Financea. Having a good idea isn’t enough to build a business. b. Entrepreneurs need funds: You have to spend money to make money.Who pays for private investment spending?In the modern economy, individuals and firms that create physical capital often do it with other people’s money.Savings–investment spending identity: savings and investment spending are always equal for the economy as a whole.The Savings–Investment Spending Identity in a Closed EconomyTotal income = total spendingTotal income can go to consumer spending (C)or government purchases of goods and service (G)or be saved (S).GDP = C+ G+ S.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Total income = consumption spending + savings. Total spending consists of either consumption spending (C+ G) or investment spending (I):GDP = C+ G+ I.Total spending= consumption spending + investment spending. Putting these equations together, we get:C+ G+ S= C+ G+ IS= Ior savings = investment spending.Budget surplus: excess of tax revenue over government spending.Budget deficit: excess of government spending over tax revenue.Budget balance:the difference between tax revenue and government spending.National savings: the sum of private savings and the budget balance (the total amount of savings generated within the economy).Net capital inflow is the total flow of funds into a country minus the total flow of funds out of a country.The loanable funds market: a hypothetical market that illustrates the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders.Crowding out occurs when a government budget deficit drives up the interest rate and leads to reduced investment spending.Crowding out is not a concern in a depressed economy; rather, increased government spending raises income (and private