Question

explain the expression: G-T=S-I

what it is how it is obtained

Answer 1

G-T=S-I

The RHS (S - I) is the uninvested savings. AKA, net private savings

The LHS (G - T) stands for National Deficit

This equation is called a Sectoral balance Equation where

G = Government Spending

T = Taxes

S = Savings

I = Investment

G - T = public sector balance

I - S = balance in private sector

The spending done by the government is either saved or invested or get back to the government in the form of taxes.

S - I = 0 implies that the net private domestic sector is in equilibrium. The equation assumes that there is current account balance, X - M = 0

where X = exports

M = imports

Derivation:

We know that GDP = C+I+G+(X-M) --------equation 1

C = consumption

I = investment

G = government spending

X- M = net exports

GDP can also be defined as GDP = C+S+T -----equation 2

using equation 1 and 2, we get

C+I+G+(X-M) = C+S+T

since, X - M = 0 (current account in balance)

(I - S) = (T - G)

(G-T) = (S-I)

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