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Similarly, if a national economy runs a trade surplus, the trade sector will involve an outflow of financial capital to other countries. A trade surplus means that the domestic financial capital is in surplus within a country and can be invested in other countries.

The fundamental notion that total quantity of financial capital    demanded equals total quantity of financial capital supplied must always remain true. Domestic savings will always appear as part of the supply of financial capital and domestic investment will always appear as part of the demand for financial capital. However, the government and trade balance elements of the equation can move back and forth as either suppliers or demanders of financial capital, depending on whether government budgets and the trade balance are in surplus or deficit.

Domestic saving and investment determine the trade balance

One insight from the national saving and investment identity is that a nation’s balance of trade is determined by that nation’s own levels of domestic saving and domestic investment. To understand this point, rearrange the identity to put the balance of trade all by itself on one side of the equation. Consider first the situation with a trade deficit, and then the situation with a trade surplus.

In the case of a trade deficit, the national saving and investment identity can be rewritten as:

Trade deficit  =  Domestic investment – Private domestic saving – Government (or public) savings (M – X)  =  I – S – (T – G)

In this case, domestic investment is higher than domestic saving, including both private and government saving. The only way that domestic investment can exceed domestic saving is if capital is flowing into a country from abroad. After all, that extra financial capital for investment has to come from someplace.

Now consider a trade surplus from the standpoint of the national saving and investment identity:

Trade surplus  =  Private domestic saving + Public saving – Domestic investment (X – M)  =  S + (T – G) – I

In this case, domestic savings (both private and public) is higher than domestic investment. That extra financial capital will be invested abroad.

This connection of domestic saving and investment to the trade balance explains why economists view the balance of trade as a fundamentally macroeconomic phenomenon. As the national saving and investment identity shows, the trade balance is not determined by the performance of certain sectors of an economy, like cars or steel. Nor is the trade balance determined by whether the nation’s trade laws and regulations encourage free trade or protectionism (see Globalization and Protectionism ).

Exploring trade balances one factor at a time

The national saving and investment identity also provides a framework for thinking about what will cause trade deficits to rise or fall. Begin with the version of the identity that has domestic savings and investment on the left and the trade deficit on the right:

Domestic investment – Private domestic savings – Public domestic savings  =  Trade deficit I – S – (T – G)  =  (M – X)

Questions & Answers

list three possible ways of addressing and adverse balance of payment
Meribah Reply
when MPs is 0.3 and autonomous consumption is 30billion what is d consumption expenditure
queen Reply
what is macroeconomic?
Shahidul
Consumption expenditure becomes: C = 30b + 0.3Y without lump sum tax and C = 30b + 0.3Yd with lump sum tax
olumide
Macroeconomics deals with the study of the behavior of aggregate individuals, firms or government in an economy in relation to consumption patterns and decision making
olumide
If the government decrases spending by ksh. 500 billion what is the change in output given MPC is 0.75
Gichana Reply
375
Philip
how can policy makers strike the balance between inflation and unemployment?
Oreva Reply
c=800 + 0.75y i=500 G=900 compute the equilibrium level of national output
Omar Reply
y=c+I+g+(X-M) y=800+.75y+500+900+0 y-.75y=2200 .25y=2200 y=2200/.25 y=8800=national level of output
Anik
Please tell me the current crr, repo rate etc
Ranjeeta Reply
cash reserve ratio is the amount that is deposit by the commercial bank in Central bank.... n repo rate is a loan interest amount
Sahar
what is slr madam sahar
Rohit
jo amount bank reserve rakhti hai bank mai customers k liye jese ATM mai ya bank mai rakha hota hai, wo slr hota hai
Sahar
pakka sahi hai
Rohit
good joke
Rohit
Argentina Lose !!😭😭
MR.ASHIM
SLR refers to that portion of total deposits of a commercial bank which it has to keep with itself in the form of cash reserve
Ranjeeta
What is cash crop?
Ranjeeta Reply
commeciaal crops
Amal
So jowar is not cash crop?
Ranjeeta
anything which is plant inorder to sell in the market
Simeon
How demand deposits are different from savings?
Ranjeeta
can unemployment be a factor of inflation?
David Reply
yeah it has an impact on cost push inflation
Vincent
microeconomics is individual firms and macroeconomics is a large as a full
kendra Reply
That's true 👍
Kwibuka
word micro means small and tiny part. word macro means large and big part.
saddiq
Exactly
Emmanuel
is unemployment another cause of inflation?
David
can I say unemployment can cause inflation?
David
no. unemployment can possibly lead to deflation
Asdfghjkl
if their are no production am I correct to say inflation will occurs
David
one of the causes of inflation is excess demand. if there's no production there would be no demand so no inflation
Asdfghjkl
if we take a look at inflation, it occur because of low production. High price chasing few goods.
David
So are you saying demand creates supply?
David
to an extent because if s9mething is demanded, it's likely to be supplied
Asdfghjkl
OK am still confused, if there is unemployment low production, and employment high production, inflation high increase in price, how can production be high and we are faced with inflation? When inflation is referred to higher price chasing few goods.
David
if the demand is increased , what is the graphics on it?
Tadesse Reply
what is macroeconomics
Prosenjit Reply
large-scale economics, such as interest rates or the gross national national product rate of of a country
Michael
Macroeconomics: is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies.
Khadar
well said
Michael
hello everyone, would like to ask a favor... i need your help to answer this problem: Assume that equilibrium GDP is 400B; potential GDP is 500B, the marginal propensity to consume is 9/10, the interest rate is 8%, investment spending is P20B, the money supply is 120B, and the reserve requirement
Jerelyn
is 1/10. By how much and in what direction should the Fed change the monetary base?
Jerelyn
what are the factors that influence surplus budget? and its effects
Christopher Reply
what is credit creation
Christopher
join
Christopher
how monetary and fiscal policy affect money supply? on economy
Christopher Reply
what is hyperinflation
David Reply
what is stagflation
Riaz
in an economy when there is both inflation & unemployment prevailing at the same time.
Yogesh
@david - hyperinflation is very rapid inflation; it is sometimes reckoned to set in when price increases exceed 50 percent per month. Such rapid inflation not merely makes money useless as a store of value, but seriously affects its use as a medium of exchange
sagar
thanks
Riaz
@yogesh: the one you are describing is Stagflation
Tutohar
I was answering to Riaz's querry.
Yogesh
Sorry, didn't see the question
Tutohar
what is credit creation?
Christopher
what are the factors that influencing surplus budget
Christopher
may I ask master level questions on this chat?
saddiq Reply
yes
deepali
am so confused about the concept of scarcity. can u hlp me
saddiq
 · Concepts of Scarcity. Scarcity refers to the condition of insufficiency where the human beings are incapable to fulfill their wants in sufficient manner. In other words, it is a situation of fewer resources in comparison to unlimited human wants. Human wants are unlimited.
Shittu
what is PPC
Kalpana
Production possibility curve is a curve that shows different possibilities of production of a set of two good which can be produced with the given resources
Ranjeeta
micro vs macro which is complex in your view?
Bijaya

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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