Question

Define the savings-investment identity, being sure to discuss each of the components in the identity. Explain how it can help us predict the flow of loanable funds either in or out of our economy.

Answer 1

According to saving investment identity

S=I

Where saving is the funds that are not consumed and investment is purchase of goods to create future wealth. Thus according to this identity savings in an economy is equal to investment. In open economy

I+G+(X-M) =S+T

Where I is investment, G is govt expenditure, X-M is net exports, X=exports and M imports, T is tax

According to this equation if saving is more than investment, liana let funds will flow out and if investment is more than saving resources will flow into the economy