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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 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.

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

Why does the trade balance and the current account balance track so closely together over time?

Using the national savings and investment identity, explain how each of the following changes (ceteris paribus) will increase or decrease the trade balance:

a. A lower domestic savings rate

b. The government changes from running a budget surplus to running a budget deficit

c. The rate of domestic investment surges

Both the United States and global economies are booming. Will U.S. imports and/or exports increase?

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

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
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