An economist states that in an open economy investment can exceed saving.Determine whether the statement is...

An economist states that in an open economy investment can exceed saving.Determine whether the statement is true or false by referring to the relationship between saving investment and current account

Solutions

Expert Solution

The statement is true.

( A closed economy doesn't have trade relations with other nations. On the other hand , an open economy has trade relations with other nations.

In a closed economy, Savings must equal income in an accounting sense.ln an open economy, however savings can exceed investment.

When an open economy is in equilibrium

NX =S+T-G-I

This means that, trade balance ( Exports-imports , denoted as NX) must be equal to saving ( the sum of private saving, S ,and public saving T-G {Tax-goverment expenditure}) minus Investment;a trade deficit must correspond to an excess of investment over saving and trade surplus must correspond to an excess of saving over Investment.

When there is a trade surplus ( often represented by the Increase of exports over imports in the current account), it implies not lending to the country from the rest of the world.

When a country saves more than it invests S+(T-G)-I will be positive.The current account surplus will be equal to the amount by which national savings exceed investment.

For example, Japan has current account surplus and savings exceed investment in Japan.)

Rahul Sunny answered 1 year ago

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