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Chapter 29: Problem 3

If a country saves more than it invests domestically, what must be true of its net foreign investment?

Short Answer

Expert verified
If a country saves more than it invests domestically, it must be the case that the country's net foreign investment is positive because the extra savings are invested abroad.

Step by step solution

01

Understand the Concepts

Net foreign investment refers to the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. Domestic savings are the total amount of savings made by a country's citizens and businesses. Domestic investment refers to the total investment made within a country's economy.
02

Relate the Concepts

In the case where a country saves more than it invests domestically, it would mean that there are excess savings. These excess savings should be invested somewhere to generate returns. In other words, if the domestic investment cannot absorb all the savings, these excess savings may be invested abroad.
03

Establish the Relation

The excess savings, when invested abroad, increases the country's foreign assets, leading to a rise in its net foreign investment. This is because when domestic savings exceed domestic investments, the extra savings become net foreign investment.

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