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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

Does a trade surplus help to guarantee strong economic growth?

If imports exceed exports, is it a trade deficit or a trade surplus? What about if exports exceed imports?

Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1% of Germany鈥檚 GDP; private savings is 20% of GDP; and physical investment is 18% of GDP.

a. Based on the national saving and investment identity, what is the current account balance?

b. If the government budget surplus falls to zero, how will this affect the current account balance?

If a country is running a government budget surplus, why is (T 鈥� G) on the left side of the saving investment identity?

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

global financial crises?
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