Question

What is saving in open economy? Discuss what are differences of saving in closed and open economy?

Answer 1

It shall be noted that in an open economy Saving = Investment + Net Exports

Where, Saving = Private Saving + Public Saving

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While, in open economy Saving = Investment + Net Exports, in closed economy, Saving = Investment

Closed Economy

1. GDP = C + I + G

2. GDP = C + S + T

3. I + G = S + T

4. I = S + (T – G) Investment = Private Savings + Public Saving

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Open Economy

1. GDP = C + I + G + (X – M)

2. GDP = C + S + T

3. I + G + (X – M) = S + T

4. I = S + (T – G) + (M – X)

since (M – X) = KI because the current account deficit equals the capital account surplus

Investment = Private Saving+ Public Saving + Capital Inflows

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Where: C = consumption

I = investment

G = government spending

S = private savings

T = taxes

X = exports

M = imports

T - G = Public Saving

KI = capital inflows from abroad