Question

(limit 150 words long for each)

1. If national savings decline, what will happen to domestic investment and net foreign investment?

2. If a country saves more than it invests domestically, what must be true of its net foreign investment?

Answer 1

We know output Y= C+I+G and

Savings S=Y-C-G

For closed economy S=l ( Not inopen economy).

CA = EX - IM

So, S=I+ CA or

S-I = CA

And there is a vital balance of payment (BOP) relationship between savings and investment and the CA and Capital Account. Private companies can borrow money for domestic investment on the foreign market here. Capital account surplus means external capital inflows, which modify financial liabilities and assets, must be funded at the national level with the CA deficit. Capital outflow is comparable to net foreign investment – capital outflow also called total capital outflow.
Any sales that surpass savings contributions correlate with shifts in its net liabilities.

1. Here "S" is shortfall, then international borrowing must fund domestic investment. And that's going to reduce net foreign investment. Although it works through the CA shortfall, which is seen as the "S" and "I" difference. Capital inflows would also fund the CA deficit; therefore the net capital outflow will be lower. The domestic expenditure here is independent of "S," so "I" means saving is not less than "l."

2. It will create a positive CA surplus so that net foreign investment will rise as extra savings will go to international lending. Consequently, CA surplus equals BOP when there is a capital account deficit so that capital flows out. The Net Capital Flow will therefore increase.

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