Saving and investment in the

National income accounts

 Events that occur within the financial system are central to
understand the development in the overall economy.
 Just we have just seen the institution that make up this system –the
bond market ,the stock market, bank and mutual funds have the
role of coordinating the economy saving and investment.
 Saving and investment are important determinant of long run
growth of GDP and living standard.
 As a result, macroeconomist need to understand how financial
markets and various events and policies effect them.
 Some important
identities
GDP IS BOTH INCOME IN AN ECONOMY AND TOTAL
EXPENDITURE OF AN ECONOMY'S OUTPUTS OF GOODS AND
SERVICES DENOTED BY Y , CONSUMPTION C, INVESTMENT I
,GOVERNMENT SPENDING G AND NET EXPORT NX.
Y= C + I + G + NX
• THIS EQUATION IS IDENTITY BECAUSE EVERY DOLLAR IN EXPENDITURE
THAT IS ON LEFT SIDE ALSO SHOWS UP ONE OF THE COMPONENT ON
THE LEFT HAND SIDE BECAUSE OF THE EACH VARIABLE IS DEFINED AND
MEASURED THIS EQUATION MUST ALWAYS HOLD.
 In order to simplify our analysis we assume that the economy is closed[A
economy which does not deals with the international trade of goods and
services nor deal with the international lending and borrowing]
 As the economy is closed .It does deal with the international trade[import and
export] therefore net export will be zero.
 We can write
 Y=C+I+G
 This equation states that GDP is the sum of consumption, investment
and government purchases. Each unit of output sold in a closed
economy is consumed ,invested and or bought by the government.
 To see what this identity tells about financial market, subtract C and
G from both sides of equation.
Y–C–G=I
 As the left side of equation(Y - C - G)is the total income of economy
remain after paying consumption and government purchases. This
amount is called national saving and is denoted by Substituting S for
(Y - C - G).We can write equation.
S=I
 This equation states that saving equals to investment.
 To understand the meaning of national saving .Let T be the amount
that government collect the amount from household in tax minus
the amount it pays back to household in the form of transfer
payment(social security and welfare).We can write
S = Y - C – G …..1 saving=private saving-public
saving
S = (Y – T - C)+(T - G) ...2 S= (Y - T -C) - ( T - G)

 These two equation are same as the Ts in second equation cancel

each other, but each T reveal a different way of thinking about
national saving. The second equation separate the national saving
into two pieaces:private saving(Y-T-C) and public saving(T-G)
 Private saving
 Amount of income that household have left after paying taxes and
paying their consumption. As household receive income from Y , pay
taxes T and spend C on consumption.. Private saving is Y-T-C.
 Public saving
 Amount of tax revenue left after paying of its spending. The
government receive T in tax revenue and spend G on goods and
services. If the T is greater than G we call this saving budget surplus as
they receive more money than its spending. This surplus T-G represent
public saving.
 government spend
 more than it receive in tax revenue, than G is greater than T. In this case
the government is facing budget deficit, and public saving T-G is
negative number.
The meaning of saving and
investment.
 saving and investment can sometime be confusing. We use these
terms casually and some time interchangeably, but
macroeconomists use these terms very carefully and distinctly.
For example Alvin earn more the he spend and he deposited his
unspent income in bank, or buy some stock and bonds from
corporation .Alvin might think he is investing his money but
macroeconomist call this saving rather than investment.
 Investment
 purchase of new capital, such a new equipment or building. For
example adeel borrow from the bank to build himself a new house.
He adds to the nation investment.(remember purchase a new
house is the one of the household spending that is investment rather
than consumption)
 Although the accounting identity S = I saving and investment is
equal for the economy as a whole but this does not have to be true
for every individual household and firm. Alvin saving is greater than
his investment and he can deposited the excess in the bank, and
adeel saving will b less then his investment and he can borrow the
shortfall from the bank.

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