Matching up Savings
and Investment
Spending
Chapter 9-1
Matching Up Savings and
Investment

According to the savings–investment
spending identity, savings and investment
spending are always equal for the economy as a
whole.
Two Sources of Saving
1. Domestic Saving
2. Foreign Saving
Closed Economy Algebra
GDP = C + I + G
I = GDP - C - G
S =GDP+TR-T-C
S
=T-TR-G
NS= S + S
NS=(GDP+TR-T-C)+(T-TR-G)
NS=GDP-C-G
PRIVATE
GOVERNMEN
PRIVAT
GOVERNME
I = NS
Investment = National Saving
NS= S + S
I = NS
Investment spending is equal to private
saving plus the budget balance
(Government Saving)
PRIVAT
GOVERNME
Governments Saving /
Dissaving



The budget balance is the difference between
tax revenue and government spending.
The budget surplus is the difference between
tax revenue and government spending when tax
revenue exceeds government spending.
The budget deficit is the difference between
tax revenue and government spending when
government spending exceeds tax revenue.
National Saving
NS = S
PRIVAT

+S
GOVERNMENT
National savings, the sum of private savings
plus the budget balance, is the total amount of
savings generated within the economy.
Closed Economy
In a closed economy: GDP = C + I + G
SPrivate = GDP + TR − T − C
SGovernment = T − TR − G
NS = SPrivate + SGovernment = (GDP + TR − T − C) + (T − TR −
G)
= GDP − C − G
Hence, I = NS
Investment spending = National savings in
a closed economy
A Budget Surplus
A Budget Deficit
The Savings–Investment
Spending Identity in an Open
Economy
I = SPrivate + SGovernment + (IM − X) = NS + KI
Investment spending = National savings +
Capital inflow in an open economy
Capital Inflow
Capital Inflow-Net inflow of funds into a
country
Capital Inflow
Equals
Inflow of Foreign funds
minus
Outflow of Domestic funds
Capital Inflow can be Negative
The Savings-Investment Spending Identity in Open
Economies: the United States, 2003
The Savings-Investment Spending Identity in Open
Economies: Japan, 2003
Open Economy Algebra
KI = IM - X
I = (GDP - C - G) + (IM - X)
I = SPrivate + SGovernment + (IM − X)
I = NS + KI
Inflows Good or Bad?
Investment spending eventualy have to be
repaid
If financed by domestic saving it is repaid
into the economy
If financed by Capital Inflow it is repaid out
of the economy
Think back to Chapter 8 There are positive
side effects too!
Financial Markets
Financial Markets channel the saving of
households to business for Investment
spending
Market for Loanable funds
The loanable funds market is a
hypothetical market that examines the
market outcome of the demand for funds
generated by borrowers and the supply of
funds provided by lenders.
The interest rate is the price, calculated
as a percentage of the amount borrowed,
charged by the lender to a borrower for
the use of their savings for one year.
The Demand for Loanable Funds
Rate of Return
The rate of return of a project is the
profit earned on the project expressed
as a percentage of its cost.
The Supply for Loanable Funds
Equilibrium in the Loanable Funds Market
Savings, Investment Spending, and
Government Policy
Quantity of private loanable funds demanded falls
Increasing Private Savings