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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

what's marginal utility?
Abena Reply
the additional utility you get if you can consume one more unit of the good x
Luka
Thanks... then what's the law of diminishing marginal utility ?
Abena
The utility decreases with every unit you consume (most of the time). The first unit of consumption will therefore give you the highest utility. Sorry about my english
Luka
Okay... I understand now
Abena
Great!
Luka
hello room
Lawal
one of the leading industrial nations of the world ranking second in manufacturing output after the USA is a. Russia b. Germany c. Britain d. Japan
Lawal
china
Siddharth
japan
Siddharth
good morning
Lamin
hi
Rafiu
hi
nivedha
japan
Ylaine
morning
Adegboye
no other questions?
Ylaine
hii
Dipun
I am from India
Dipun
same question are not mentioned
Dipun
first you give my answer
Dipun
hi
adelakun
welcome
Ahmed
dipun naik
Ahmed
whats your question
adelakun
whats your question
adelakun
I am from India
Dipun
retype the questions
adelakun
marginal untility is the last point desire of a consumer that gets benefit from related good/ service.
Saboor
Why are some countries rich and why are some countries poor? . is poorness a human cause?
Yacquub
well several factors are included...it's not just because of human..
Ylaine
what is a correct reason
Vijay
Japan
Lawal
countries which are rich they are developed countries they have good resources minerals technology power knowledge to use the resources poor countries are under developing countries they have lack of resources, knowledge and if they have these so they dont know the use of these resources.
Siddharth
so these knowledgeable people move /migrate to the other rich/developed countries
Siddharth
Poverty of a country is also related to cultural, economical, and military domination. Usually, the dominant country imposes all of these powers when diplomatically needed or sometimes by force.
Ernest
You can also have considerable poverty in a rich country when such poverty is measured within sectors of its population. In other words, economic indicators can sometime mask such poverty.
Ernest
For example, the U.S.A. has a very high measure of GDP per capital, but millions of Americans ( a considerable amount are children) live in poverty.
Ernest
So poverty is not an easy social phenomenon to pin down neatly into one social realm or another.
Ernest
pls what is price ceiling
jasmine
its the max price a seller can charge for a product, mostly imposed by the government to protect the consumer
Luka
its the max price a seller can charge for a product, mostly imposed by the government to protect the consumer plus it must be imposed below the equilibrium price in order to be effective. A shortage will also be created after its imposition.
Zafar
can happiness be measured?
Ylaine
Happiness is too subjective to be measured as an economic phenomenon or reality. I think that happiness happens at several levels of the human condition: biological, psychological, intellectual and at the level of the soul. How can economic theory be scientific about it?
Ernest
about I have read of something called gross happiness index.
Ylaine
Germany
Arthur
What is economies of scale
Jeremiah Reply
In microeconomics, economies of scale are the sum of total costs saved or that a firm has advantage over its competitors due to its scale of operations. More specifically, it is the firm's cost savings per unit of output that it gains as its production increases in scale.
Ernest
one of the leading industrial nations of the world ranking second in manufacturing output after the USA is ......... a. Russia b. Germany c. Britain d. Japan
Lawal
what is supply of demand?
Joseph Reply
supply of demand?
Yuusuf
1)importance of internal trade. 2) international trade barriers 3) principles of international trade
umar Reply
how can tell me about the GDP
Mahmood
explain the basic economic concept using ppc ?
Nurul Reply
scarcity can be represented by imagining a country producing only 2 goods and the resources to do so are fixed, hence a choice must be made and how to divide the limited resources between the two goods. you can choose any combination of the two goods that fall directly on the curve which represents
Justin
maximum efficiency and the highest possible output at this point in time. if you choose to not utilize all the resources then you will be inefficient (not to your best ability) and produce below the curve. however if you have increases in technology or find new resources you can shift the curve out
Justin
Please what is meant by resources allocation
albert Reply
Please I need explanation about resources allocation
albert
what is cost
Mohit Reply
Cost:-is the sacrifice or measured price paid to acquire, produce or maintain a good or service
Yuusuf
exactly
Emmanuel
thanks
Yuusuf
To what extend is labour, capital, land and entrepreneur considered as free good
Prince
#what is public finance
Ryan Reply
public finance is the study of how the government generates and spends to facilitate the day to day operations. simply put its an analysis of the income/expenditure statement of the government and how it affects welfare
Justin
#kk fenks
Ryan
you say it all
Emmanuel
what is economic model
chantal Reply
it may differ as different economist model ,but as to me it is a formal presentation of economic theory.
miidhagaa
what are the factors affecting utility
Silas
compare the ways in which resources are allocated in market and command economies
stella Reply
is profit maximization the only6 objective of private sectors
Alain Reply
no
KOPO
it's so difference way
Gohaan
pls can u guys tell me y it not....
Alain
there is equally prestige, sales managment, to solve unemployment, to maximize capacity
Jacque
"in the private sector profit maximization is the main but not the only goal of the firm"discuss pls
Alain
what is the difference between a co-operative and joint stock copany
Ndi
a join stock company is one in which there is a large number of shareholders who provide the capital in varrying proportion while a cooperative society is a non profit making organization that is owned and directly control by it member.example are producers cooperative...
Alain
thank Alain Aji
Ndi
Another one what Is Nationalisation
Ndi
Nationalization is the process of transforming private assets into public assets by bringing them under the public ownership of a national government or state
Alain
that's right thanks
Ndi
and what is Nationalised industry
Ali
what are the principle of governing a cooperative
Ndi
these are business organizations,which were created by individuals but taken over by the government.
Ndi
i agree your opinion
Hi
Greetings
Dango
What's National income
Dango
reduction of risk also
Ibrahim
why is economics different from pure science...
Jacque Reply
it's because the methodology is scientific in nature,for example we have economics in geography,history,but with pure science it deal with the nature..
Alain
science uses logic to study and systematic method and economic uses practical methods to deal with d current economic scenario
shaikh
but it is said in general that it is a science ...why?
Jacque
because it only deals with human behavior
Ibrahim
Economics is a science since it use some scientific methods but not as pure science that's why it's refers as social science
Yuusuf
Mister Kay. Economics is a (Social) Science. It deals with human beings and uses a systematic and logical body of theories, laws and assumptions to study and interpret human behaviour in the face of choice making in an environment where resources are naturally scarce, insufficient or unavailable.
Kolawole
economics is considered different from the pure sciences such as chemistry and physics for the simple fact that it can't be isolated in a lab or test tube and studied. in economics we can't control all the variables and study the effect of the outcome of tweaking just one variable.
Justin
hence it's not a perfect science. to make up for this we use the assumption of ceterius paribus or holding all else constant. In the real world it's dynamic and we can't isolate for eg a change in income on demand holding all else constant (prices of goods, etc)
Justin
What is the relationship between quantity demanded and quantity supplied at equilibrium? What is the relationship when there is a shortage? What is the relationship when there is a surplus?
Sualihu Reply
When QS greater than QD, it costed the price to drop
Zeyi
equilibrium is the market price
Zeyi
at equilibrium, demand meets supply, thus a right price , good enough to ensure no waste of supply or shortage of demand
Foluso
The relationship between quantity demanded and quantity supplied at equilibrium is that there is satisfaction between supply and demand. Prices increases when there is increased in demand and vice versa.
Muhammad
what is expenditure of consumer
Patrick Reply
Consumer spending, consumption, or consumption expenditure is the acquisition of goods and services by individuals or families. It is the largest part of aggregate demand at the macroeconomic level. There are two components of consumer spending: induced consumption and autonomous consumption. ...
richard
found this hope it helps. :)
richard
how can we calculate price elasticity
Bijaya
okey thank you
Bijaya
How can we calculate price elasticity?
Sualihu
% change in qty demand over % change in price
Keith
the volume of people who are willing and able to pay for a good or a service
Shadreck Reply

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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