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Chapter 10: Q. 26 (page 266)

What are the two main sides of the national savings and investment identity?

Short Answer

Expert verified

Demand and supply of financial capital.

Step by step solution

01

Step1. 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

Step2. Explanation

The 2 main sides are supply and demand of financial capital.

Supply side includes- Savings and Trade deficit (as trade deficit leads to increased inflow of foreign capital hence it will comprise of supply)

Demand side includes- Investment, and the difference of government expenditure and taxation.

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Most popular questions from this chapter

Table 10.7 provides some hypothetical data on

macroeconomic accounts for three countries represented

by A, B, and C and measured in billions of currency

units. In Table 10.7, private household saving is SH,

tax revenue is T, government spending is G, and

investment spending is I.


ABC
SH700500600
T00500500
G600350650
I800400450

Table 10.7 Macroeconomic Accounts

a. Calculate the trade balance and the net inflow of

foreign saving for each country.

b. State whether each one has a trade surplus or

deficit (or balanced trade).

c. State whether each is a net lender or borrower

internationally and explain.

If foreign investors buy more U.S. stocks and bonds, how would that show up in the current account balance?

State whether each of the following events involves a financial flow to the U.S. economy or away from the U.S. economy:

a. Export sales to Germany

b. Returns paid on past U.S. financial investments in Brazil

c. Foreign aid from the U.S. government to Egypt

d. Imported oil from the Russian Federation

e. Japanese investors buying U.S. real estate

For each of the following, indicate which type of government spending would justify a budget deficit and which would not.

a. Increased federal spending on Medicare

b. Increased spending on education

c. Increased spending on the space program

d. Increased spending on airports and air traffic control

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?
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