What is the saving and investment equation? If national saving declines, what will happen to domestic investment and net foreign investment?

Understanding national saving is crucial as it represents the portion of a country's income that is not consumed by immediate needs or government spending. To put it plainly, national saving is the residual of a country's income after covering all consumption and government expenditures. It can be represented mathematically as
\[ National\text{ }Saving = Total\text{ }Income - (Consumer\text{ }Spending + Government\text{ }Spending) \].

This leftover income is then available for investment within the economy. National saving is a vital source of capital for countries, as it funds domestic investments, such as infrastructure and business development, which are critical for economic growth. In scenarios where national saving declines—perhaps due to increased consumption or government spending—there can be significant consequences for both domestic investment and net foreign investment, resulting in potential long-term impacts on the country's economic health and growth potential.

Domestic investment refers to the total amount of resources put into enhancing a nation's production capabilities. This includes investments in businesses, infrastructure, and technology within the country. Essentially, it's about investing in the country's future productive capacity. In an economy, the funds for such investment largely come from national saving.

An essential point to understand is how domestic investment relates to the saving and investment equation, which is a fundamental identity given by \( S = I \). Any decrease in national saving directly impacts the amount of money available for businesses and the government to invest, because less saving means fewer resources that can be utilized for investments. Therefore, in layman's terms, a drop in national saving tends to result in a decrease in domestic investment. This decline could hamper economic growth, as fewer investments may lead to a slowdown in the expansion of the economy's productive capacity.

Net foreign investment, often abbreviated as NFI, is an important metric for an economy, encapsulating the difference between what domestic citizens invest in foreign countries and what foreign entities invest domestically. To elaborate, \( Net\text{ }Foreign\text{ }Investment = Domestic\text{ }Citizens'\text{ }Foreign\text{ }Investments - Foreigners'\text{ }Domestic\text{ }Investments \).

When a country's residents invest more abroad than foreigners invest locally, net foreign investment is positive, suggesting capital outflow from the country. Conversely, if foreigners invest more domestically than the residents invest abroad, net foreign investment is negative, reflecting a capital inflow.

In the context of national saving, a decline implies lesser funds are available to be invested both domestically and internationally. Consequently, net foreign investment may decrease as the capital that could be invested abroad by domestic citizens diminishes. To put it simply, with less saving, the country becomes a less attractive destination for foreign investment and also has less capacity to invest overseas.