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Now, consider the factors on the left-hand side of the equation one at a time, while holding the other factors constant.

As a first example, assume that the level of domestic investment in a country rises, while the level of private and public saving remains unchanged. The result is shown in the first row of [link] under the equation. Since the equality of the national savings and investment identity must continue to hold—it is, after all, an identity that must be true by definition—the rise in domestic investment will mean a higher trade deficit. This situation occurred in the U.S. economy in the late 1990s. Because of the surge of new information and communications technologies that became available, business investment increased substantially. A fall in private saving during this time and a rise in government saving more or less offset each other. As a result, the financial capital to fund that business investment came from abroad, which is one reason for the very high U.S. trade deficits of the late 1990s and early 2000s.

Causes of a changing trade balance
Domestic Investment   – Private Domestic Savings   – Public Domestic Savings   = Trade Deficit
I S (T – G) = (M – X)
Up No change No change Then M – X must rise
No change Up No change Then M – X must fall
No change No change Down Then M – X must rise

As a second scenario, assume that the level of domestic savings rises, while the level of domestic investment and public savings remain unchanged. In this case, the trade deficit would decline. As domestic savings rises, there would be less need for foreign financial capital to meet investment needs. For this reason, a policy proposal often made for reducing the U.S. trade deficit is to increase private saving—although exactly how to increase the overall rate of saving has proven controversial.

As a third scenario, imagine that the government budget deficit increased dramatically, while domestic investment and private savings remained unchanged. This scenario occurred in the U.S. economy in the mid-1980s. The federal budget deficit increased from $79 billion in 1981 to $221 billion in 1986—an increase in the demand for financial capital of $142 billion. The current account balance collapsed from a surplus of $5 billion in 1981 to a deficit of $147 million in 1986—an increase in the supply of financial capital from abroad of $152 billion. The two numbers do not match exactly, since in the real world, private savings and investment did not remain fixed. The connection at that time is clear: a sharp increase in government borrowing increased the U.S. economy’s demand for financial capital, and that increase was primarily supplied by foreign investors through the trade deficit. The following Work It Out feature walks you through a scenario in which private domestic savings has to rise by a certain amount to reduce a trade deficit.

Solving problems with the saving and investment identity

Use the saving and investment identity to answer the following question: Country A has a trade deficit of $200 billion, private domestic savings of $500 billion, a government deficit of $200 billion, and private domestic investment of $500 billion. To reduce the $200 billion trade deficit by $100 billion, by how much does private domestic savings have to increase?

Step 1. Write out the savings investment formula solving for the trade deficit or surplus on the left:

(X – M)  =  S +  (T – G)  – I

Step 2. In the formula, put the amount for the trade deficit in as a negative number (X – M). The left side of your formula is now:

–200  =  S + (T – G) – I

Step 3. Enter the private domestic savings (S) of $500 in the formula:

   –200  =  500  + (T – G) – I

Step 4. Enter domestic investment (I) of $500 into the formula:

       –200  =  500  + (T – G) – 500

Step 5. The government budget surplus or balance is represented by (T – G). Enter a budget deficit amount for (T – G) of –200:

      –200  =  500  + (–200) – 500

Step 6. Your formula now is:

(X – M)  =  S + (T – G) – I –200  =  500 + (–200) – 500

The question is: To reduce your trade deficit (X – M) of –200 to –100 (in billions of dollars), by how much will savings have to rise?

(X – M)  =  S + (T – G) – I –100  =  S + (–200)  –  500 600  =  S

Step 7. Summarize the answer: Private domestic savings needs to rise by $100 billion, to a total of $600 billion, for the two sides of the equation to remain equal (–100 = –100).

Questions & Answers

What do you means by patten law in economic?
Tamba Reply
Do you mean patent law or patten law?
Patent I'm sorry..
Australian patent law is law governing the granting of a temporary monopoly on the use of an invention, in exchange for the publication and free use of the invention after a certain time. The primary piece of legislation is thePatents Act 1990 (Cth).
Demand for canned goods when it was reported that super typhoon hagupit will landfall in the Philippine area of responsibility on sunday night
leonard Reply
opportunity cost ?
opportunity cost is the alternative forgone after making a choice
what is macroeconomic
its the study of the interractions of the various components of economics as a whole
please suggest me topic for research, about following issues 1. labor migration & economic growth 2. terrorism and trade 3. religious pessimism and trad
Fayaz Reply
state the law of diminishing returns.
Ronaxic Reply
the law diminishing returns states that as more and more units of variable factors of production(such as capital, labour) are combined with a fixed factor (such as land) after a certain point, the marginal product diminishes or declines
I would like to add one more point In the above statement. The addition of more variable factors of production will only leads to diminishing returns if the existing fixed capacity is fully utilised.
what is diminishing marginal utility
Ronaxic Reply
with more units of consumption of a same commodity you will feel less satisfied with every next commodity. if you are thirsty you purchase a bottle of Coca-Cola and drink it, you will be satisfied at the same time again you drink another bottle of Cola you will be less satisfied in comparison.
utility nothing it is just a measurement of your satisfaction.
and diminishes as long as you consume same commodity continuously
how to calculate the national income
what is the problem of economic in the world?
i think the problem of economics is how to use scarce resources to satisfy unlimited wants
what is taxation
K.visor Reply
levy paid by eligible individuals and companies to the government
A means by which governments finance their expenditure by imposing charges on citizens and corporate entities. Governments use taxation to encourage or discourage certain economic decisions.
a source of economic revenue in which working citizens pay levy which varies from one individual to the other.
monies paid by residents of a country to the government in which the residents benefit indirectly
it's the government, looking for funding to create public goods and services so that everyone can be happy.
why does the demand curve slop downward
why does the demand curve slop downward?
the demand curve is nothing but a line which shows willingness to purchase a commodity or a thing.For example, if you want to purchase a Pepsi can you are willing to purchase 5 Pepsi cans if they are of $3 each. but if they are of $5 each you want to purchase only three of them.
so at Higher prices you like to purchase less quantity that's why demand curve falls down words. but please note demand curve does not fall downwards always for inferior goods the rise up parts like a supply curve because at Higher prices you tend to purchase those goods more
and at lower prices of inferior goods you tend to avoid them and relocate your Limited money to other goods.
what is taxation?
jacob Reply
In simple term. Taxation can be defined as compulsory payment levy on company or individual by the government. It can be direct or indirect.
what is capital
its nice
it's nice
capital , it is a investment of money or assets which is invested before starting up of the business
its nice
disadvantage of money
Bigdreamz Reply
it won't let you sleep
Please any Ghanaian schooling at KNUST?
Prince Reply
combining factors of production is the role of
Richard Reply
the situation in economic where by a more valuable good is sold at a low price while less valuable good is sold at a higher price .how can we describe this situation in economic
price discrimination
deman and supply
price discrimination
you can take example of water and daimond. you can ask someone to choose anyone from above 1. to a person in a Sahara desert and 2. a girl in London. you will get your answer
it depends upon the buyer's preference what he wants why he wants and what is the necessity of that product at current time.
causes of high elasticity of demand
Onyango Reply
causes of high elasticity of supply
what is optimazation
what is trade offs
A trade-off  is a situational decision that involves diminishing one quality, or property of a design in return for gains in other aspects.
what is indifference curve ?
its represnted by the loops of points and gives same level of satisfaction
what is enterpreneurship
Entrepreneurship is the talent, knowledge and willingness individual has to engage in an activity that can result in new kind of firm
what is the short run industry supply curves?
I think there' s a mistake. P = - 0.4 + 0.2Qs is the supply curve and not the demand curve. Am I correct?
Valeria Reply
Qs is quantity supplied
This is what I think
this eaquation is supply curve Qs=P-0.4 the relationship is positive when the price increase the Qs increase....
since Qs is quantity supplied P= -0.4 + 0.2Qs =>P +0.4=0.2Qs =>P/0.2 + 0.4=Qs I made Qs the subject of the formula or equation. So your answer is correct
P = -0.4 + 0.2Qs is the same as P/0.2+0.4=Qs Price has a direct relationship with the quantity supplied i.e the higher the price the higher the quantity supplied. that is why it is +0.4(this is the quantity and it is postive) and P/O.2(is the price and it is positive).
For the demand equation let me give an example 0.2P-0.4=Qd. Here the P is postive(+0.2) and the quantity which is -O.4 is negative( because of the negative sign(-) there is an inverse relationship between price and quantity. For quantity demanded the higher the price the lower the quantuty.
It's how I understand it
0.2P-0.4=Qd. the equation is wrong because the price have direct ralationship Quantity demanded but the correct equation is-0.2P -0.4=Qd so the higher price the lower Quantity
I think the relationship is inverse because of the negative sign(-)
ok You mean the price and quantity demanded should be negative(inverse relationship) for Qd and the price and quantity supplied should be postive(direct relationship) for Qs
thank you for the correction
yes because it got a positive gradient of +0.2
This is the mistake I found: "Since P is on the vertical axis, it is easiest if you solve each equation for P. The demand curve is then P = 8 – 0.5Qd and the demand curve is P = –0.4 + 0.2Qs. Note that the vertical intercepts are 8 and –0.4, and the slopes are –0.5 for demand and 0.2 for supply."
dear price do not depend on quantity. rather quantity depends on price. so the equation should be Qty=0.2Px-0.4
please can someone generate supply equation for me
David Reply
where p is price, Pr is price of related goods, G is goals of a firm E is supplier's future expectation of prices,Z is other related factors, Pf is cost of factors of production.
I think it's wrong
if Qd=90-p Qs=90+p
the coefficient of price must be positive since supply curve is positively slopping
it's true. thank you
OK, thank you
no one can do that, you must determine the the key factors for the commodity, like price, income, prices of alternative commodity, and other factors, if you want the main equation, you must have 4 values, 2 values for each quantity and price, for one commodity
What is the acceptable definition of economic?
bilya Reply
The economics is the optimal use for the resources, this is general definition, but from my point view it is the production,

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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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