- Gross Domestic Product
- Methods of Calculating GDP
- Nominal Vs. Real GDP
- GDP, National Income, and Personal Income
- Relationship Between Saving, Investment, Fiscal Balance, and Trade Balance
- The IS Curve
- The LM Curve
- Aggregate Demand Curve
- Aggregate Supply Curve
- Shifts in Aggregate Demand Curve
- Shifts in Supply Curve
- Macroeconomic Equilibrium
- Economic Growth and Inflation
- Business Cycle and Economics
- Impact of Changes in Aggregate Supply and Demand
- Sources, Measurement, and Sustainability of Economic Growth
- The Production Function

# Relationship Between Saving, Investment, Fiscal Balance, and Trade Balance

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:

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

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