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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 鈥� X) = I + (G 鈥� 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

Occasionally, a government official will argue that

a country should strive for both a trade surplus and a healthy inflow of capital from abroad. Explain why such a statement is economically impossible.

Some economists warn that the persistent trade

deficits and a negative current account balance that the United States has run will be a problem in the long run. Do you agree or not? Explain your answer.

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

A government official announces a new policy.

The country wishes to eliminate its trade deficit, but will strongly encourage financial investment from foreign firms. Explain why such a statement is contradictory.

The United States exports 14% of GDP while Germany exports about 50% of its GDP. Explain what that means.
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