Key Concepts and Summary

Key Concepts and Summary

The national saving and investment identity is based on the relationship that the total quantity of financial capital supplied from all sources must equal the total quantity of financial capital demanded from all sources. If S is private saving, T is taxes, G is government spending, M is imports, X is exports, and I is investment, then for an economy with a current account deficit and a budget deficit:

\(\begin{array}{rcl}\text{Supply of financial capital}& \text{=}& \text{Demand for financial capital}\\ \text{S + (M – X)}& \text{=}& \text{I + (G – T)}\end{array}\)

A recession tends to increase the trade balance (meaning a higher trade surplus or lower trade deficit), while economic boom will tend to decrease the trade balance (meaning a lower trade surplus or a larger trade deficit).

Glossary

national savings and investment identity

the total of private savings and public savings (a government budget surplus)