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Explain the link between private saving, investment and the public budget deficit, assuming a closed economy.

Explain the link between private saving, investment and the public budget deficit, assuming a closed economy.

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Answer #1

National saving is equal to National investment in a closed economy. National savings is the sum of private saving and public saving. Public saving is another term for public budget deficit but public saving is the difference between revenue and expenditure of the government while public budget deficit is the the difference between the expenditure and the revenue of the government.

In a closed economy, therefore, investment should be equal to the sum of private saving and public budget deficit. Private saving is the saving of household which is the the leftover disposable income after deducting consumption and taxes while adding Transformers in the disposable income. In an open economy the difference is provided by the net exports.

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