Macroeconomics (DSE 5.

1A)
Unit II- National Income Accounting
Lecture – 6
Saving-Investment Identity

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. The flow variable investment must
be financed by some combination of private domestic saving, government saving (surplus),
and foreign saving.
This is an ‘identity’ meaning it is true by definition. This identity only holds true because
investment here is defined as including inventory accumulation, both deliberate and
unintended. Thus, should consumers decide to save more and spend less, the fall in demand
would lead to an increase in business inventories. The change in inventories brings saving
and investment into balance without any intention by business to increase investment.

The basic macroeconomic identity is given by

C +I + G + (X – M) ≡ Y ≡ C + S + T + Rf -------------- (1)

Let the economy be closed which means there will be no scope for export, import and foreign
transfers i.e. X= 0, M= 0, Rf = 0.

Let there also be no government intervention. So, there is no existence of taxes, i.e. T=0.

Thus equation (1) becomes

C+I≡Y≡C+S

This identity shows that output produced is identically equal to income received and income
received is spent on goods and services and saved.

So, C + I ≡ C + S

Or, I ≡ S
 More Numerical Problems

1. From the following data calculate Gross Domestic Product at Market Price

● i) Gross national product at factor cost 6,150 Cr

● ii) Net exports (-)50 Cr
● iii) Compensation of employees 3,000 Cr
● iv) Rent 800 Cr
● v) Interest 900 Cr
● vi) Undistributed Profit 1,300 Cr
● vii) Net indirect taxes 300 Cr
● viii) Net domestic capital formation 800 Cr
● ix) Gross fixed capital formation 850 Cr
● x) Change in stock 50 Cr
● xi) Dividend 300 Cr
● xii) Factor income to abroad 80 Cr

Solution:

Gross Domestic Product at Market Price

=NDP at factor cost + Net Indirect taxes+ Consumption of fixed capital (depreciation)

= Compensation of employees + Rent + Interest + Undistributed Profit +Mixed income+ Net

Indirect taxes+ Consumption of fixed capital (depreciation)

=Rs 3,000 crore+ Rs 800 crore+ Rs 900 crore+ Rs 1,300 crore+ Rs 0crore+ Rs 300 crore+
(Rs 850 crore+ Rs 50 crore- Rs 800 crore)

= Rs 3,000crore+ Rs 800 crore+ Rs 900 crore+ Rs 1,300 crore+ Rs 300 crore+ Rs 300 crore+
Rs 100 crore

= Rs 6,700 crore

Note: Consumption of fixed capital (depreciation) = Gross fixed capital formation + Change

in stock – Net domestic capital formation

2. From the following data, estimate the net value added at factor cost and show that it
is equal to the sum of factor incomes :–

● Sales Rs. 11000

● Change in stock 680
● Intermediate Consumption Rs. 2370
● Depreciation Rs. 450
● Wages and salaries Rs. 5400
● Interest Rs. 250
● Rent Rs. 750
● Profit Rs. 2150
● Net indirect Taxes Rs. 310
● Students scholarship Rs 75

Solution : Net Value added at Factor Cost = Sales + increase in stock – Intermediate
Consumption –
Depreciation- Net Indirect Taxes

= 11000 + 680- 2370- 450- 310

= Rs. 8550

Sum of Factor Incomes = Wages & salaries + Interest + Rent + Profit

= 5400 + 250 + 750 + 2150

= Rs 8550

Hence showed, Net Value added at Factor Cost = Sum of Factor Incomes = Rs 8550