Explain how savings, investment, and trade are related in the national accounts?

Question:

Explain how savings, investment, and trade are related in the national accounts?

National Income and Product Account:

National income and product accounts (NIPA) provide information about the level and composition of economic activities in the United States. The accounts are maintained by the Bureau of Economic Analysis.

Answer and Explanation:

According to the expenditure approach of GDP account, we have:

  • consumption + investment + government expenditure + exports - imports = GDP

Rearranging the terms, we have:

  • investment + (exports - imports ) = (GDP - consumption - government expenditures)
  • investment + net exports = savings
  • investment = savings + (-net exports)

The above equations shows that a nation's investment is financed through two sources: (1) domestic investment; (2) a trade deficit. This is because a trade deficit implies a negative net exports, hence the term (-net exports) is positive.


Learn more about this topic:

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Gross Domestic Product: Using the Income and Expenditure Approaches

from Economics 102: Macroeconomics

Chapter 4 / Lesson 2
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