Can a country have high investment if it doesn't not have a high rate of domestic...

Can a country have high investment if it doesn't not have a high rate of domestic savings? Please explain.

Expert Solution

The national savings and investment identity is based on the total quantity of financial capital being demanded and supplied .

Investments could be high even when the domestic savings is less. As we know that investments could be from both domestic and foreign savings where domestic savings include both government and private savings . The equation is given by

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

where the left side of the equation explains the investments ie the ones done by private sector and (G-T) being the government borrowings .

Whereas the right side shows S which is savings and (M-X) is the inflow of foreign capital from foreign investors.

If the domestic investments are more than the domestic savings , it implies that the capital is being inflowed from sources other than the domestic savings.

Hence a country can have a higher investments even when the domestic savings are low because of inflow of capital from abroad.

(You can comment for doubts )

Rahul Sunny answered 2 years ago

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