By on December 3rd, 2017

12 thoughts on “Current Account = Savings – Investment

  1. Suppose domestic saving is insufficient to finance Domestic investment. How will the domestic investment be financed?

    It will be financed by investment from abroad. These capital flows are a credit on the capital account and will be matched by a deficit on the current account.

    I don’t understand,
    “””””These capital flows are a credit on the capital account and will be matched by a deficit on the current account.”””””

    Only I will take credit for my investment. why will be matched by deficit on the current account??????

  2. what is the impact on savings, investment, and consumption if a country is forced to have a balanced current account (X-M)=0?

    1. a possible scenario is that you might desincentivize investment from abroad because all the goods and services to deploy that capital in the country that is forced to have a 0 trade balance would be more expensive.
      Second, people stop importing but that doesn’t mean they save more, but that they are forced to buy more “home made” expensive stuff.
      Third, people do save and finance the investment as in a closed economy.

  3. How does this jibe with mark carney’s view of banking as “money creation” on both sides of the balance sheet? Banks create the savings when they create the loan. It renders the whole discussion moot, no? It’s all controlled by banks.

  4. Hi! Thank you for the explanation, the content is great!
    However, could you explain more on why GNP=C+G+S? Or can anyone help?
    Thanks a lot!

    1. You can look at it this way:
      your production (GNP) is equal to your income (GNI); and you use your income for consumption (household (C) and government(G)) and for saving (S); thus

      GNP=GNI=C+G+S

  5. You can look at it this way:
    your production (GNP) is equal to your income (GNI); and you use your income for consumption (household (C) and government(G)) and for saving (S); thus

    GNP=GNI=C+G+S

  6. I was looking through the causes of a current account surplus in a text book and one cause was:
    a net inflow of investment income

    I was wondering how this causes a surplus

  7. There is also a « Current account surplus» to « Net Saving » casuality.

    Net Exported goods generate an increase in domestic production/revenues but not an increase in domestic consumption (i.e. the consumption is from the RoW). The difference between the additional production(Y) and consumption (which is nil), results in an increase of Saving.

    Hope this makes sense

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