Saving and Investment

As we have seen, output can be’ either consumed or invested. Investment is an essential economic activity because it increases the capital stock available for future production. One of the most important points about national accounting is the identity between saving and investment. We will show that, under the accounting rules described above, saving is-exactly equal to measured This equality is an identity which means that it must hold by definition.

National in Equal national investment by definition. The components or investment are private domestic investment and foreign investment (or net exports). The sources of saving are private saving (by households and businesses) and government saving (the government budget surplus). Private investment plus net exports equals private saving plus the budget surplus. These identities must hold always, whatever the state of the business cycle.

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