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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: tarheeldan on March 02, 2017, 12:31:43 PM

Title: Help with balance sheet - leverage model
Post by: tarheeldan on March 02, 2017, 12:31:43 PM

Hi! I am teaching my friend Macroeconomics for fun, and we thought we'd use the Spring 2014 Macro course from MIT OpenCourseware. The lecture notes contain a model to show the vulnerabilities of the financial system, which is cool - but it's driving me crazy that the notes have equity as a liability. Can someone make sense of it?
https://ocw.mit.edu/courses/economics/14-02-principles-of-macroeconomics-spring-2014/lecture-notes/MIT14_02S14_LecNotes1-7.pdf

For instance, on slide 8, NW/Equity is 160, which makes sense as Assets (1000+50+10) less Liabilities (900) = 160. But in the table, under liabilities, is "Equity 160". That would imply a net worth of zero! Argh.

Title: Re: Help with balance sheet - leverage model
Post by: MDM on March 02, 2017, 01:41:43 PM

See slide 6: it's a matter of definition.  See also https://en.wikipedia.org/wiki/Balance_sheet.

Title: Re: Help with balance sheet - leverage model
Post by: tarheeldan on March 02, 2017, 02:08:03 PM

Thanks!