![]() ![]() The national saving and investment identity must always hold true because, by definition, the quantity supplied and quantity demanded in the financial capital market must always be equal. What about Budget Surpluses and Trade Surpluses? Chart (b) shows the potential results when the budget deficit falls (or budget surplus rises). economy and public savings.įigure 31.2 Effects of Change in Budget Surplus or Deficit on Investment, Savings, and The Trade Balance Chart (a) shows the potential results when the budget deficit rises (or budget surplus falls). economy has two main sources for financial capital: private savings from inside the U.S. ![]() The identity begins with a statement that must always hold true: the quantity of financial capital supplied in the market must equal the quantity of financial capital demanded. The national saving and investment identity, which we first introduced in The International Trade and Capital Flows chapter, provides a framework for showing the relationships between the sources of demand and supply in financial capital markets. The National Saving and Investment Identity Let’s begin with a review of why one of these three options must occur, and then explore how interest rates and exchange rates adjust to these connections. When governments are borrowers in financial markets, there are three possible sources for the funds from a macroeconomic point of view: (1) households might save more (2) private firms might borrow less and (3) the additional funds for government borrowing might come from outside the country, from foreign financial investors. ![]() Evaluate the role of budget surpluses and trade surpluses in national saving and investment identity.Explain the national saving and investment identity in terms of demand and supply.By the end of this section, you will be able to: ![]()
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