Chapter 9: Problem 27

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

Short Answer

Expert verified

The main components of the national savings and investment identity are: 1. Gross Domestic Product (GDP): \(GDP = C + I + G + (X - M)\) 2. Gross National Income (GNI): \(GNI = GDP + NFI\) 3. Private Savings (S_p): \(S_p = Y_d - C - T\) 4. Government Savings (S_g): \(S_g = T - G\) 5. National Savings (S): \(S = S_p + S_g\) The national savings and investment identity is given by: \[S = I + (X - M)\]

Step by step solution

National Income

The starting point of the national savings and investment identity is the national income equation, which expresses GDP as the sum of consumption (C), investment (I), government spending (G), and net exports (X - M): \[GDP = C + I + G + (X - M)\]

Gross National Income (GNI)

GNI is the total income earned by a nation's residents and businesses, including product taxes and income from abroad. It is closely related to GDP: \[GNI = GDP + NFI\] where NFI (Net Factor Income) represents the difference between income received from abroad and income paid abroad.

Private Savings

Private savings (S_p) represent the income that remains after deducting consumption and taxes (T) from disposable income (Y_d): \[S_p = Y_d - C - T\]

Government Savings

Government savings (S_g) signify the government's ability to collect taxes and finance its spending. It is the difference between taxes and government spending: \[S_g = T - G\]

National Savings

National savings (S) is the sum of private and government savings, which is an essential component of the national savings and investment identity: \[S = S_p + S_g\]

National Savings and Investment Identity

Finally, the national savings and investment identity expresses the equality between total national savings and the sum of domestic investments and net exports: \[S = I + (X - M)\] This equation reflects that national savings can either be used to finance domestic investments or can be invested abroad (net exports).

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