Question

What are the main components of the national savings and investment identity?

Short answer

Savings, Trade deficit, Investments, Government borrowings.

Step-by-step solution

Step1. Introduction

The savings-investment identity is-

S + (M – X) = I + (G – T)

where,

S- Savings,

M- Imports,

X-Exports,

I- Investments,

G- Government Expenditure,

T- Taxes

Step2. Explanation

The 2 main sides are supply and demand of financial capital.

There are further 4 components of the identity equation-

Savings, which includes both household savings and the corporate savings.

Trade deficit, as trade deficit leads to increased inflow of foreign capital hence it will comprise of supply.

Investments, includes both household and corporate investments

The difference of government expenditure and taxation, referred to as government borrowing, as when expenditure exceeds receipts, government will borrow and constitute the demand of financial capital.