Question

Explain whether the given statement is true, false or uncertain. Start your answer by selecting one of the options – “True”, “False” or “Uncertain” and then provide arguments to justify your selection (be brief and concise and present your arguments in 100 or less words). You need to ensure your assumptions are clear, reasonable and explicit if making any.

Question:

The saving rate (gross domestic saving as a % of GDP) in Singapore, a small open economy, was 48% in 2017 while the investment rate (domestic investment as a % of GDP) was 25%. As a result, there was net outflow of capital from Singapore in 2017.

Answer 1

The above given statement is true

Here, we will consider saving and investment identity function under which supply of financial capital equals to demand of capital.

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

Where S is savings ,

G - T is government expenditure after reducing taxes which shows government deficit

M - X is imports less exports showing trade surplus

I is level of investment

These variables shift places according to prevailing situations in the economy

In the above question government expenditure is not stated clearly so it could be running in deficit or surplus . Here we will assume government to be in deficit but lesser than the savings rate in the economy because of it's given high proportion .

Savings rate are given as 48% and investment rate are given as 25% .

When the investment is almost halfway​ lower than the savings to keep savings investment identity in equilibrium the excess savings will result in financial outflow of capital and thus will result in trade surpluses.