Question

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What is the relationship between national saving and investment in a closed economy? Start by explaining...

What is the relationship between national saving and investment in a closed economy? Start by explaining what is a closed economy.

Expert Solution

# What is closed Economy?

In closed Economy there are no imports and exports which means

Y = C + I +G

# What is the relationship between national saving and Investment in closed economy?

Case - 1 When there are no taxes

Y - C -G = I

Here Y = GDP

C = Consumption Expenditure

G = Government Expenditure

I = Investment

Therefore Y-C-G is national saving.

Hence national saving = Investment.

Case: 2 when there is taxes.

Y-C-T +T-G = I

( Just added and Subtracted 'Taxes' in above equation.)

Y-C-T = Private Saving

T -G = Public Saving.

Private Saving + Public Saving = National Saving.

Again National Saving = Investment.

Therefore in Closed Economy National saving equals Investment.

Rahul Sunny answered 2 years ago

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