savings investment gap

What is the formula linking the Current Account Balance (CAB) to savings and investment?

CAB = S – I

What does it mean if a country's savings exceed its investment (S > I)?

It results in a current account surplus

What happens when a country's investment exceeds its savings (I > S)?

It results in a current account deficit

Why does the savings-investment gap exist?

Because domestic savings may not be enough to fund domestic investment needs, requiring foreign capital (borrowing or investment)

How does borrowing from overseas affect the current account balance?

It increases foreign capital inflows → Financial account surplus → Balances a current account deficit

Why does Australia often have a current account deficit?

• High investment needs (natural resources, infrastructure)

• Average savings rate compared to other OECD countries

• This mismatch leads to I > S → CAB deficit

Does a current account deficit indicate a weak economy?

No, it reflects structural factors like growth and capital needs. Borrowing to invest in productive assets can support long-term growth.

Name factors that can influence a country’s savings-investment gap.

• Household savings rate

• Government surplus/deficit

• Business retained earnings

• Investment booms (e.g., mining)

• Interest rates

• Global capital flows