National saving

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In economics, a country's national saving is the sum of private and public saving. It equals a nation's income minus consumption and the government’s taxes levied.

Economics social science that analyzes the production, distribution, and consumption of goods and services

Economics is the social science that studies the production, distribution, and consumption of goods and services.

Saving income not spent, or deferred consumption

Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recurring costs. In terms of personal finance, saving generally specifies low-risk preservation of money, as in a deposit account, versus investment, wherein risk is a lot higher; in economics more broadly, it refers to any income not used for immediate consumption.

Government budget balance Difference between revenues and spending

A government budget is a financial statement presenting the government's proposed revenues and spending for a financial year. The government budget balance, also alternatively referred to as general government balance, public budget balance, or public fiscal balance, is the overall difference between government revenues and spending. A positive balance is called a government budget surplus, and a negative balance is a government budget deficit. A budget is prepared for each level of government and takes into account public social security obligations.

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Economic model

Closed economy with public deficit or surplus possible

In this simple economic model with a closed economy there are three uses for GDP (the goods and services it produces in a year). If Y is national income (GDP), then the three uses of C consumption, I investment, and government purchases can be expressed as:

Gross domestic product market value of goods and services produced within a country

Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a period of time, often annually. GDP (nominal) per capita does not, however, reflect differences in the cost of living and the inflation rates of the countries; therefore using a basis of GDP per capita at purchasing power parity (PPP) is arguably more useful when comparing differences in living standards between nations.

Consumption (economics) purchase and use of goods and services

Consumption is a major concept in economics and is also studied in many other social sciences.

In macroeconomics, investment is the amount of goods purchased or accumulated per unit time which are not consumed at the present time. The types of investment are residential investment in housing that will provide a flow of housing services over an extended time, non-residential fixed investment in things such as new machinery or factories, human capital investment in workforce education, and inventory investment.

National saving can be thought of as the amount of remaining income that is not consumed, or spent by government. In a simple model of a closed economy, anything that is not spent is assumed to be invested:

National saving can be split into private saving and public saving. Denoting T for taxes paid by consumers that go directly to the government and TR for transfers paid by the government to the consumers as shown here:

(Y − T + TR) is disposable income whereas (Y − T + TR − C) is private saving. Public saving, also known as the budget surplus, is the term (T − G − TR), which is government revenue through taxes, minus government expenditures on goods and services, minus transfers. Thus we have that private plus public saving equals investment.

The interest rate plays the important role of creating an equilibrium between saving S and investment in neoclassical economics.

Neoclassical economics is an approach to economics focusing on the determination of goods, outputs, and income distributions in markets through supply and demand. This determination is often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production, in accordance with rational choice theory.

where the interest rate r affects saving positively and affects physical investment negatively.

Open economy with balanced public spending

In an open economic model international trade is introduced. Therefore the current account is split into exports and imports:

An open economy is an economy in which there are economic activities between the domestic community and outside. People and even businesses can trade in goods and services with other people and businesses in the international community, and funds can flow as investments across the border. Trade can take the form of managerial exchange, technology transfers, and all kinds of goods and services.

International trade exchange of capital, goods, and services across international borders or territories

International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product (GDP). While international trade has existed throughout history, its economic, social, and political importance has been on the rise in recent centuries. Carrying out trade at an international level is a more complex process than domestic trade. Trade takes place between two or more nations. Factors like the economy, government policies, markets, laws, judicial system, currency, etc. influence the trade. The political relations between two countries also influences the trade between them. Sometimes, the obstacles in the way of trading affect the mutual relationship adversly. To avoid this, international economic and trade organisations came up. To smoothen and justify the process of trade between countries of different economic standing, some international economic organisations were formed. These organisations work towards the facilitation and growth of international trade.

Current account

In economics, a country's current account is one of the two components of its balance of payments, the other being the capital account. The current account consists of the balance of trade, net primary income or factor income and net cash transfers, that have taken place over a given period of time. The current account balance is one of two major measures of a country's foreign trade. A current account surplus indicates that the value of a country's net foreign assets grew over the period in question, and a current account deficit indicates that it shrank. Both government and private payments are included in the calculation. It is called the current account because goods and services are generally consumed in the current period.

The net exports is the part of GDP which is not consumed by domestic demand:

If we transform the identity for net exports by subtracting consumption, investment and government spending we get the national accounts identity:

The national saving is the part of the GDP which is not consumed or spent by the government.

Therefore the difference between the national saving and the investment is equal to the net exports:

Open economy with public deficit or surplus

The government budget can be directly introduced into the model. We consider now an open economic model with public deficits or surpluses. Therefore the budget is split into revenues these are the taxes (T) and the spendings there are transfers (TR) and government spendings (G). Revenue minus spending results in the public (governmental) saving:

The disposable income of the households is the income Y minus the taxes net of transfers:

Disposable income can only be used for saving or for consumption:

where the subscript P denotes the private sector. Therefore private saving in this model equals the disposable income of the households minus consumption:

By this equation the private saving can be written as:

and the national accounts as:

Once this equation is used in Y=C+I+G+X-M we obtain

By one transformation we get the determination of net exports and investment by private and public saving:

By another transformation we get the sectoral balances of the economy as developed by Wynne Godley. This corresponds approximately to Balances Mechanics developed by Wolfgang Stützel:

See also

Related Research Articles

IS–LM model

The IS–LM model, or Hicks–Hansen model, is a macroeconomic tool that shows the relationship between interest rates (ordinate) and assets market. The intersection of the "investment–saving" (IS) and "liquidity preference–money supply" (LM) curves models "general equilibrium" where supposed simultaneous equilibria occur in both interest and assets markets. Yet two equivalent interpretations are possible: first, the IS–LM model explains changes in national income when price level is fixed short-run; second, the IS–LM model shows why an aggregate demand curve can shift. Hence, this tool is sometimes used not only to analyse economic fluctuations but also to suggest potential levels for appropriate stabilisation policies.

In economics, the fiscal multiplier is the ratio of a change in national income to the change in government spending that causes it. More generally, the exogenous spending multiplier is the ratio of a change in national income to any autonomous change in spending that causes it. When this multiplier exceeds one, the enhanced effect on national income is called the multiplier effect. The mechanism that can give rise to a multiplier effect is that an initial incremental amount of spending can lead to increased income and hence increased consumption spending, increasing income further and hence further increasing consumption, etc., resulting in an overall increase in national income greater than the initial incremental amount of spending. In other words, an initial change in aggregate demand may cause a change in aggregate output that is a multiple of the initial change.

In macroeconomics, aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It specifies the amounts of goods and services that will be purchased at all possible price levels. This is the demand for the gross domestic product of a country. It is often called effective demand, though at other times this term is distinguished.

The marginal propensity to save (MPS) is the fraction of an increase in income that is not spent on an increase in consumption. That is, the marginal propensity to save is the proportion of each additional dollar of household income that is used for saving. It is the slope of the line plotting saving against income. For example, if a household earns one extra dollar, and the marginal propensity to save is 0.35, then of that dollar, the household will spend 65 cents and save 35 cents. Likewise, it is the fractional decrease in saving that results from a decrease in income.

Consumer spending, consumption, or consumption expenditure is the acquisition of goods and services by individuals or families. It is the largest part of aggregate demand at the macroeconomic level. There are two components of consumer spending: induced consumption and autonomous consumption.

Net national income (NNI) is an economics term used in national income accounting. It can be defined as the net national product (NNP) minus indirect taxes. Net national income encompasses the income of households, businesses, and the government. Net national income is the difference between what is earned by nationals living inside and outside the country put together and non-nationals living in the country.

The saving identity or the saving-investment identity is a concept in national income accounting stating that the amount saved in an economy will be the amount invested in new physical machinery, new inventories, and the like. More specifically, in an open economy, private saving plus governmental saving plus foreign investment domestically must equal private physical investment. In other words, the flow variable investment must be financed by some combination of private domestic saving, government saving (surplus), and foreign saving.

Internal balance in economics is a state in which a country maintains full employment and price level stability. It is a function of a country's total output,

A commodity currency is a name given to some currencies that co-move with the world prices of primary commodity products, due to these countries' heavy dependency on the export of certain raw materials for income.

In economics, aggregate expenditure (AE) is a measure of national income. Aggregate expenditure is defined as the current value of all the finished goods and services in the economy. The aggregate expenditure is thus the sum total of all the expenditures undertaken in the economy by the factors during a given time period. It is the expenditure incurred on consumer goods, planned investment and the expenditure made by the government in the economy. In an open economy scenario, aggregate expenditure also includes the difference between the exports and the imports.

Balanced budget Financial plan where revenues equal expenses

A balanced budget is a budget in which revenues are equal to expenditures. Thus, neither a budget deficit nor a budget surplus exists. More generally, it is a budget that has no budget deficit, but could possibly have a budget surplus. A cyclically balanced budget is a budget that is not necessarily balanced year-to-year, but is balanced over the economic cycle, running a surplus in boom years and running a deficit in lean years, with these offsetting over time.

The Mundell–Fleming model, also known as the IS-LM-BoP model, is an economic model first set forth (independently) by Robert Mundell and Marcus Fleming. The model is an extension of the IS-LM model. Whereas the traditional IS-LM model deals with economy under autarky, the Mundell–Fleming model describes a small open economy. Mundell's paper suggests that the model can be applied to Zurich, Brussels and so on.

In macroeconomics, the twin deficits hypothesis or the twin deficits phenomenon, is the proposition that there is a strong causal link between a nation's government budget balance and its current account balance.

Aggregate income is the total of all incomes in an economy without adjustments for inflation, taxation, or types of double counting. Aggregate income is a form of GDP that is equal to Consumption expenditure plus net profits. 'Aggregate income' in economics is a broad conceptual term. It may express the proceeds from total output in the economy for producers of that output. There are a number of ways to measure aggregate income, but GDP is one of the best known and most widely used.

In Economics, the Absolute Income Hypothesis concerns how a consumer divides his disposable income between consumption and saving It is part of the theory of consumption proposed by English economist John Maynard Keynes (1883–1946). The hypothesis has been refined extensively during the 1960s and 1970s, notably by American economist James Tobin (1918–2002).

Sectoral balances

The sectoral balances are a sectoral analysis framework for macroeconomic analysis of national economies developed by British economist Wynne Godley.

In economics, saving-investment balance or I-S balance is a balance of national savings and national investment, which is equal to current account. This relationship is obtained from the national income identity.

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