SAVING, INVESTMENT, AND THEIR RELATIONSHIP TO THE INTERNATIONAL FLOWS

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SAVING, INVESTMENT, AND THEIR RELATIONSHIP TO THE INTERNATIONAL FLOWS

A nation’s saving and investment are crucial to its long-run economic growth. As we have seen earlier in this book, saving and investment are equal in a closed economy. But matters are not as simple in an open economy. Let’s now consider how saving and investment are related to the international flows of goods and capital as measured by net exports and net capital outflow.

As you may recall, the term net exports appeared earlier in the book when we discussed the components of gross domestic product. The economy’s gross domestic product (Y) is divided among four components: consumption (C), investment (I), government purchases (G), and net exports (NX). We write this as

                                                                   Y=C+I+G+N + NX

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SAVING, INVESTMENT, AND THEIR RELATIONSHIP TO THE INTERNATIONAL FLOWS