Question

In the national income accounting identity showing the equality between national saving and investment, what is the representation of private saving and what is the representation of public saving?

Answer 1

Before answering the question, let us define the instruments of national accounting.

Y = Income or GDP

C = Consumption

I = Investment

T = Tax

G = Government Spending

S = Savings

The national income accounting identity showing the equality between national saving and investment is the following:

S = I........(1)

Now, the Savings (S) is defined as

S = Y - C - G

This is the residual output after consumption (C) and government expenditures (G).

Hence, putting S in equation (1) we get

S = I

or, Y - C - G = I

Now, adding and subtracting the Tax (T) in the left side of the above equation we get,

Y - C - G + T - T = I

or, (Y - C - T) + (T - G) = I..........(2)

This equation represents the public and private savings in the economy.

✓ Public Savings is basically the savings of the Government. This is Tax Revenue (T) less Government Spending (G). This is represented as (T - G) in the above equation (2).

✓ Private Savings is basically the savings of the citizens. This is Disposable Income (Y - T) less Consumption (C). This is represented as ​​​​​​

​​​​​​(Y - T - C) in the above equation (2).

Hence,

Savings = Investment

Private Savings + Public Savings = Investment

or, (Y - T - C) + (T - G) = I

Answer:

• (Y - T - C) = Representation of Private Savings.

• (T - G) = Representation of Public Savings.

Hope the explanation is clear to you my friend.