Question

What are the two main sides of the national savings and investment identity?

Short answer

The two main sides of the national savings and investment identity are national savings (S) and national investment (I). National savings is the sum of private (household) savings and public (government) savings, while national investment refers to the investments made within a country by businesses and the government concerning capital goods and inventories. In equilibrium, the total savings (S) must be equal to the total investment (I), as expressed by the identity: \(S = I\).

Step-by-step solution

1. Define National Savings (S)

National savings is the sum of private (household) savings and public (government) savings. In other words, it is the total amount of income that remains after consuming goods and services and paying taxes. It is represented by the acronym S in the equation.

2. Define National Investment (I)

National investment refers to the investments made within a country by businesses and the government concerning capital goods and inventories. These investments contribute to the growth and development of the country. In the national savings and investment identity, it is represented by the acronym I.

3. Understand the National Savings and Investment Identity

The national savings and investment identity is an equation that expresses the equilibrium condition in an open economy, where total savings equal total investment. This equilibrium condition states that for a given level of income, the total amount saved by households and the government (S) must be equal to the total amount invested in capital goods and inventories by businesses and government (I). In its simplest form, the identity can be written as: \[S = I\]

4. Identify the Two Main Sides of the National Savings and Investment Identity

The two main sides of the national savings and investment identity are the national savings (S) and national investment (I). These two components of the economy hold a vital relationship as savings provide the resources for investment, and investment leads to economic growth and development.