Asked by Efrem Wondale on May 05, 2024
Verified
Derive the relation between savings, domestic investment, and net capital outflow using the national income accounting identity.
Domestic Investment
Investment in resources within a country, including physical assets like machinery and buildings, contributing to economic growth and development.
National Income Accounting
A system used by a country to measure the overall economic activity, including the total income earned by the nation and how it's used.
Net Capital Outflow
The difference between the purchase of foreign assets by domestic residents and the purchase of domestic assets by foreign residents over a specific period.
- Gain insight into the notion of national savings and its formulation in relation to international commerce and investment activities.
- Elucidate the connection among domestic savings, domestic investments, and net exports.
- Understand the dynamics and implications of international capital flows and investments.
Verified Answer
MS
Maksym ShevchenkoMay 09, 2024
Final Answer :
Start from the national income accounting identity,
(1) Y = C + I + G + NX.
Recall from Chapter 25 that national saving is the income that is left after paying for current consumption and government expenditure,
(2) S = Y - C - G.
Rearranging, (1) we obtain Y - C - G = I + NX, and substituting in (2)
(3) S = I + NX.
Because net exports also equal net capital outflow, we can also write this equation as
(4) S = I + NCO.
(1) Y = C + I + G + NX.
Recall from Chapter 25 that national saving is the income that is left after paying for current consumption and government expenditure,
(2) S = Y - C - G.
Rearranging, (1) we obtain Y - C - G = I + NX, and substituting in (2)
(3) S = I + NX.
Because net exports also equal net capital outflow, we can also write this equation as
(4) S = I + NCO.
Learning Objectives
- Gain insight into the notion of national savings and its formulation in relation to international commerce and investment activities.
- Elucidate the connection among domestic savings, domestic investments, and net exports.
- Understand the dynamics and implications of international capital flows and investments.