To understand the relation between savings, investments, fiscal balance, and trade balance, we will combine the income and expenditure approach to calculating GDP.

We know that,

GDP = C + I + G + (X – M)

We also know that,

GDP = C + S + T

Where,

C = Consumption spending

S = Government and household saving

T = Net taxes

We can equate the above two equations:

C + I + G + (X – M) = C + S + T

The government deficit (G – T) deficit can be expressed in terms of savings and investments as follows:

(G – T) = (S – I) – (X – M)

G – T represents government deficit

S – I represents excess of private savings over private investments

X – M represents trade surplus. A negative (X – M) represents trade deficit.

From the above equation we can conclude that:

Trade deficit (G – T >0) must be finance by:

1. Excess of private savings over private investments (S – I > 0), or
2. Trade deficit (X – M < 0), or
3. Combination of both