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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

Many think that the size of a trade deficit is due

to a lack of competitiveness of domestic sectors, such as autos. Explain why this is not true.

What three factors will determine whether a nation has a higher or lower share of trade relative to its GDP?

How does the bottom portion of Figure 10.3, showing the international flow of investments and capital, differ from the upper portion?

In recent decades, has the U.S. trade balance usually been in deficit, surplus, or balanced?

Describe a scenario in which a trade surplus benefits an economy and one in which a trade surplus is occurring in an economy that performs poorly. What key factor or factors are making the difference in the outcome that results from a trade surplus?
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