<< Chapter < Page Chapter >> Page >

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 is the law of demand
Yaw Reply
price increase demand decrease...price decrease demand increase
ıf the price increase the demand decrease and if the demand increase the price decrease
all other things being equal, an increase in demand causes a decrease in supply and vice versa
how is the economy of usa now
What is demand
jude Reply
Demand is the quantity of goods and services a consumer is willing and able to purchase at various prices over a given period of time.
Okay congratulations I'll join you guys later .
calculate elasticity of income exercises
If potatoes cost Jane $1 per kilogram and she has $5 that could possibly spend on potatoes or other items. If she feels that the first kilogram of potatoes is worth $1.50, the second kilogram is worth$1.14, the third is worth $1.05 and subsequent kilograms are worth $0.30, how many kilograms of potatoes will she purchase? What if she only had $2 to spend?
Susan Reply
cause of poverty in urban
DAVY Reply
QI: (A) Asume the following cost data are for a purely competitive producer: At a product price Of $56. will this firm produce in the short run? Why Why not? If it is preferable to produce, what will be the profit-maximizing Or loss-minimizing Output? Explain. What economic profit or loss will the
Falak Reply
what is money
DAVY Reply
money is any asset that is generally acceptable for the exchange of goods and for the settlement of debts
what is economic
Stephen Reply
economics is the study of ways in which people use resources to satisfy their wants
what is Price mechanism
Dhany Reply
what is Economics
The study of resource allocation,distribution and consumption.
introduction to economics
Uday Reply
welfare definition of economics
examine the wealth and welfare definitions of economics
read book by ml jhingan
What do we mean by Asian tigers
Aeesha Reply
Dm me I will tell u
What is Average revenue
How are u doing
it is so fantastic
it is a group of 4 countries named Singapore, South Korea, Taiwan and Hong Kong because their economies are growing very faster
Please, average revenue is an amount of money you gained after deducted your total expenditure from your total income.
what's a demand
Edward Reply
it is the quantity of commodities that consumers are willing and able to purchase at particular prices and at a given time
quantity of commodities dgat consumers are willing to pat at particular price
demand depends upon 2 things 1wish to buy 2 have purchasing power of that deserving commodity except any from both can't be said demand.
Demand is a various quantity of a commodities that a consumer is willing and able to buy at a particular price within a given period of time. All other things been equal.
State the law of demand
The desire to get something is called demand.
what is the use of something should pay for its opportunity foregone to indicate?
Random Reply
Why in monopoly does the firm maximize profits when its marginal revenue equals marginal cost
astrid Reply
different between economic n history
Falma Reply

Get Jobilize Job Search Mobile App in your pocket Now!

Get it on Google Play

Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?