10.3 The National Saving and Investment Identity

In a period of a budget and trade deficit, when private and public savings have fallen, where does money typically come from in order to fill the gap left by decreased savings?

Select the correct answer below:

credit cards and bank loans

government savings

investment from abroad

all of the above

investment from abroad

Investment from abroad typically comes in to fill the gap left by decreased savings. For example, in a period of a budget and trade deficit, when public savings have fallen, money for investment usually comes foreign investors, rather than domestic sources.

What happens in a period of trade deficit, if domestic investment rises while public and private saving remain the same?

Select the correct answer below:

the trade deficit will remain unchanged

the trade deficit will decrease

there will be a trade surplus

the trade deficit will increase

the trade deficit will increase

In a period of trade deficit, if domestic investment rises while public and private saving remain the same, the trade deficit will increase. Another way of looking at it is because the net private and public savings remain unchanged, the trade deficit will increase when domestic investment increases.

Suppose an economy has a trade surplus of $60 billion, private domestic savings of $550 billion, a government surplus of $280 billion, and private domestic investment of $770 billion. To increase the trade surplus by $40 billion, by how many billions of dollars does private domestic investment have to change (in billions of dollars)? For a fall in investment, include a negative sign in your answer.

Recall the savings investment formula:   S + (M – X) = I + (G - T)

-40 billion

Recall the savings investment formula:

(X – M) = S + (T – G) – I

Where, 

• Trade Surplus = (X−M)

• Private Domestic Savings = (S)

• Private Domestic Investment = (I)

• Government Budget Surplus (or Balance) = (T−G)

If we replace the values we are given in the question for the components of the savings investment formula

60=550+280−770

To increase the trade surplus (X – M) by $40 billion,

(X – M) = S + (T – G) – I
100=550+280 – I
550+280−100 = I  

730 = I

Private domestic investment would have to fall to $730 billion in order for the trade surplus to increase by $40 billion. Since private domestic investment was $770 billion before, it would have to change by (770−730) = $40 billion. Since the change reflects a fall in investment, we include a negative sign: −$40 billion.

Suppose an economy has a trade deficit of $320 billion, private domestic savings of $940 billion, and private domestic investment of $530 billion. How much is the government deficit (in billions of dollars)?

Recall the savings investment formula (rewritten for trade deficits):   (M−X)=I−S−(T−G)

730 billion

Recall the savings investment formula (rewritten for trade deficits):   

(M−X)=I−S−(T−G)

 

Where, 

• Trade Deficit = (M−X)

• Private Domestic Investment = I

• Private Domestic Savings = S

• Government Budget Surplus (or Balance) = (T−G)

 

If we replace the values we are given in the question for the components of the savings investment formula, 

320=530−940−(T–G)

To compute the government deficit, solve for (T−G) (as if it were an "x" variable): 
(T−G)=530−940−320
(T−G)=−730  

Therefore, we write the government budget deficit as $730 billion.

If during an economic boom, the increase in private domestic investment is more than the total increase in public and private savings, a nation with a trade deficit will experience a decrease in that trade deficit.

Select the correct answer below:

True

False

False

Recall,

Trade deficit = Domestic investment – Private domestic saving – Government (or public) savings

Therefore, if private domestic investment increases more than public and private saving, the trade deficit will increase.

In a period of trade deficit, if domestic investment does not change, public savings decreases by $5 billion, and private savings remain the same:

Select the correct answer below:

the trade deficit will remain unchanged

the trade deficit will decrease

there will be a trade surplus

the trade deficit will increase

the trade deficit will increase

The trade deficit equals domestic investment minus private saving and public saving. Therefore, when public saving decrease and investments remain the same, the trade deficit will increase, which is the case when domestic investment does not change, public savings decreases by $5 billion, and private savings remain the same

If domestic investment is less than domestic savings, then ____________________________.

Select the correct answer below:

exports are less than imports

exports are greater than imports

investors will not have enough capital

there will be a net inflow of financial capital

exports are greater than imports

From the standpoint of the national saving and investment identity:

Trade surplus = Private domestic saving + Public saving – Domestic investment

Therefore if Private domestic saving + Public saving > Domestic investment then that economy is experiencing a trade surplus which means that there will be an outflow of domestic financial capital to investments abroad and exports are greater than imports.

Suppose an economy has a trade deficit of $300 billion, private domestic savings of $600 billion, a government deficit of $300 billion, and private domestic investment of $600 billion. To reduce the trade deficit to $200 billion, by how many billions of dollars does private domestic savings have to increase?

Recall the savings investment formula:   S + (M – X) = I + (G - T)

100 billion

Recall the savings investment formula:

(X – M) = S + (T – G) – I

Where, 

• Trade Surplus = (X−M)

• Private Domestic Savings = (S)

• Private Domestic Investment = (I)

• Government Budget Surplus (or Balance) = (T−G)

If we replace the values we are given in the question for the components of the savings investment formula

–300=600+(–300)–600

To reduce the trade deficit to $200 billion,

(X – M) = S + (T – G) – I
–200 = S + (–300)–600
−200+300+600 = S   

700 = S

Savings will have to rise by (700−600) = $100 billion

Suppose an economy has a private domestic savings of $210 billion, a government surplus of $505 billion, and private domestic investment of $525 billion. How much is the trade surplus (in billions of dollars)?

Recall the savings investment formula:   S + (M – X) = I + (G - T)

190 billion

Recall the savings-investment formula after moving the terms around to represent the given information:

(X – M) = S + (T – G) – I

Where, 

• Trade Surplus = (X−M)

• Private Domestic Savings = (S)

• Private Domestic Investment = (I)

• Government Budget Surplus (or Balance) = (T−G)

If we replace the values we are given in the question for the components of the savings investment formula

Trade surplus = 210+(505)–525

The trade surplus (X – M) is $190 billion.

All of the following statements are true, except:

Select the correct answer below:

A recession tends to make a trade deficit smaller.

A recession tends to make trade surplus larger.

Strong economic growth tends to make trade deficit larger.

Strong economic growth tends to make trade surplus larger.

Strong economic growth tends to make trade surplus larger.

A recession tends to make a trade deficit smaller, or a trade surplus larger, while a period of strong economic growth tends to make a trade deficit larger, or a trade surplus smaller.

Suppose an economy has a private domestic savings of $550 billion, a government budget deficit of $420 billion, and private domestic investment of $475 billion. How much is the trade deficit (in billions of dollars)?

Recall the savings investment formula:   S + (M – X) = I + (G - T)

345 billion

Recall the savings-investment formula:

S + (M – X) = I + (G - T)

Where, 

• Trade Deficit =(M−X)

• Private Domestic Savings =(S)

• Private Domestic Investment =(I)

• Government Budget Deficit (or Balance) =(G-T)

If we replace the values we are given in the question for the components of the savings-investment formula

Trade deficit = 475+420–550

The trade deficit (M – X) is $345 billion.

Suppose an economy has a private domestic savings of $444 billion, a government deficit of $210 billion, and private domestic investment of $400 billion. How much is the trade deficit (in billions of dollars)?

Recall the savings investment formula:   S + (M – X) = I + (G - T)

166 billion

Recall the savings-investment formula and modify it to represent the trade deficit:

(M - X) = I + (G - T) - S

Where, 

• Trade Deficit = (M - X)

• Private Domestic Savings = (S)

• Private Domestic Investment =(I)

• Government Budget Deficit = (G−T)

If we replace the values we are given in the question for the components of the savings-investment formula

Trade Deficit = 400+210−444

The trade deficit (M – X) is $166 billion.