This book clarifies common confusions in macroeconomics. It does not use equations, graphs, diagrams or footnotes.
The book is designed to focus on a number of macroeconomic subjects that are so often unclear in public discussion of policy, in the press, and in economics textbooks. The book also presents information on US income distribution, as well as historical data on inflation rates, on real GDP per capita growth rates and on population growth rates.
It covers a series of important topics. Included are : “surplus of savings”; effects of the import surplus; steep and shallow yield curves; capital movements and interest rates; overvaluation of the dollar; deficits and debt; world income redistribution and petroleum prices; the decline in assessment of risk; bubbles; the “twin deficits”; the Achilles heel of the US economy; and more.
New York, January 2006
Peter M. Gutmann is professor of Economics at Baruch College of the City University of New York.
He has a doctorate from Harvard University. His dissertation title was “Income Distribution, Asset Values and Economic Growth”.
Professor Gutmann is widely known due to his pathbreaking work on the subterranean, or underground, economy which created a whole industry of articles and books by economists from all over the world on that subject.
He is the author of “Macroeconomics in Brief” and “Understanding Modern Macroeconomics”. He has published in a range of economic journals including the American Economic Review, the Journal of Income Distribution, the Review of Economics and Statistics, and others.
Professor Gutmann teaches macroeconomics and growth economics at Baruch College of the City University of New York.
1. THE COUNTRY AND THE WORLD
There is a well known relationship that applies to any country:
Private Sector Savings equal Private Sector Investment plus the Government
Deficit plus the Export Surplus (or minus the Import Surplus)
This relationship can also be stated as:
National Savings (Private Sector Savings minus Government Sector Dissavings)
minus Private Sector Investment equals the Export Surplus
or
National Savings plus the Import Surplus minus Private Sector Investment equals
zero
When a country collects its statistics after the end of the year, these relationships (which are identical) hold exactly, since they are actually identities. However, since statistics are imperfect, there will have to be an “errors and omissions” account to take care of discrepancies due to measurement error.
For the world as a whole, in principle, total exports equal total imports. But again, statistics are imperfect, so the actual figures must be adjusted with an “errors and omissions” account. (Actually, due to widespread underinvoicing of exports, total world measured imports will exceed total world measured exports.)
So, for the world as a whole, since exports equal imports when properly measured, the export and import numbers for the individual countries, when summed, cancel out. The world equation is as follows:
Private Sector Savings in the World equal Private Sector Investment in the World
plus the World’s Net Government Deficits (sum of the Government Deficits in the
World minus sum of Government Surpluses in the World)
Total private sector investment in the world is determined by the business outlook and by financing costs in the different countries. Total net government deficits in the world are determined by a variety of economic and political conditions in the world’s countries
So, we conclude that world private sector savings depend on the sum of the world’s private sector investment and the world’s net government deficits.
As a result, when the sum of the world’s net government deficits and the world’s private sector investment rise from one year to the next, the total of the world’s private sector savings will also rise.
One small confusing element has to do with the treatment of investment caried out in nationalized industries Often these are lumped in with other government expenditures in calculating the government deficit (or surplus). However, if the nationalized industries are not included in calculating the government deficit (or surplus), then the investment projects of such industries have to be included in private sector investments.
It is also possible to establish a world concept akin to the “national savings” concept. Then,
World savings ( The World’s Net Private Sector Savings minus the World’s
Net Government Sector Dissavings) equals the World’s Private Sector Investment
This formulation is correct and looks simpler, but is less helpful, since it lumps together the private sector savings and the government sector dissavings. As a result, it is not as clear that private sector savings depend on both private sector investment and public sector deficits.