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Chapter 10: Q. 27 (page 266)

What are the main components of the national savings and investment identity?

Short Answer

Expert verified

Savings, Trade deficit, Investments, Government borrowings.

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.

There are further 4 components of the identity equation-

Savings, which includes both household savings and the corporate savings.

Trade deficit, as trade deficit leads to increased inflow of foreign capital hence it will comprise of supply.

Investments, includes both household and corporate investments

The difference of government expenditure and taxation, referred to as government borrowing, 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 determines the size of a country’s 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.)

Explain briefly whether each of the following would be more likely to lead to a higher level of trade for an economy, or a greater imbalance of trade for an economy.

a. Living in an especially large country

b. Having a domestic investment rate much higher than the domestic savings rate

c. Having many other large economies geographically nearby

d. Having an especially large budget deficit

e. Having countries with a tradition of strong protectionist legislation shutting out imports

What is included in the current account balance?

If a country is a big exporter, is it more exposed to

global financial crises?
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