National Savings - Economic Model of National Savings

Economic Model of National Savings

In this simple economic closed economy model 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 G government purchases can be expressed as:

National savings can be thought of as the amount of remaining money 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 savings should be split into private savings and public savings. A new term, T is taxes paid by consumers that goes directly to the government as shown here:

(Y - T) is disposable income. (Y - T) less consumption (C) is private savings. The term (T - G) is government revenue though taxes minus government expenditures which is public savings, also known as the Budget surplus.

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

In open economy model

NX = Net eXports = eXports - iMports

NX = (X-M)

NX=Y-(C+I+G)=Y-Domestic demand

Y=C+I+G+NX

Y-C-G=National savings (S)=I+NX

S=I+NX

S-I=NX

S-I=The portion of national savings not used to financed domestic investment

=NX (Trade balance)