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Chapter 23: Q 27 (page 577)

What are the main components of the national

savings and investment identity?

Short Answer

Expert verified

the rate of GDP that is not spent in economy rather it is saved. National saving includes four main component

Step by step solution

01

Step 1.Introduction

The savings-investment identity is-

S + (M – X) = I + (G – T)

where,

S- Savings,

M- Imports,

X-Exports,

I- Investments,

G- Government Expenditure,

T- Taxes

02

Step 2. Savings

Savings include both household and business savings, It sis on supply side of financial capital. Savings by household increase with increase in income.

03

Step 3. Net exports

net exports , which means difference of exports of a country from imports of country in terms of money. As trade deficit leads to increased inflow of foreign capital hence it will comprise of supply.

04

Step 4. 

Investment made by private sector. It includes both household and corporate investments

05

Step 5. Government borrowing

Fourth and last component is government borrowing. The difference of government expenditure and taxation. As when expenditure exceeds receipts, government will borrow and constitute the demand of financial capital.

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Most popular questions from this chapter

What is more important, a country’s current account balance or GDP growth? Why?

Does a trade surplus mean an overall inflow of

financial capital to an economy, or an overall outflow of

financial capital? What about a trade deficit?

How did large trade deficits hurt the East Asian countries in the mid-1980s? (Recall that trade deficits are equivalent to inflows of financial capital from abroad.)

Imagine that the U.S. economy finds itself in the following situation: a government budget deficit of \(100 billion, total domestic savings of \)1,500 billion, and total domestic physical capital investment of \(1,600 billion. According to the national saving and investment identity, what will be the current account balance? What will be the current account balance if investment rises by \)50 billion, while the budget deficit and national savings remain the same?

Using the national savings and investment identity, explain how each of the following changes (ceteris paribus) will increase or decrease the trade balance:

  1. A lower domestic savings rate
  2. The government changes from running a budget surplus to running a budget deficit
  3. The rate of domestic investment surges
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