Savings and investment
{"Image DocumentName": "Savings and investment", "Image ImageDescription": "Rearrange the GDP equation to equate expenditures and income: Savings \ud835\udc46 \u2212 Investment \ud835\udc3c = Fiscal balance \ud835\udc3a \u2013 \ud835\udc47 + Net exports (\ud835\udc4b \u2013 \ud835\udc40) As income increases, the fiscal balance and net exports decline. If the effect of income on savings is greater than the effect on investment, the net savings (S \u2013 I) increases. Dealing with an imbalance: If (S \u2013 I) > (G \u2013 T) + (X \u2013 M), there is excess savings. If (S \u2013 I) < (G \u2013 T) + (X \u2013 M), there is excess planned investment. The balance between expenditure and income is the result of a changing real interest rate: If there is excess savings, the real rate will decline. If there is excess planned investment, the real rate will increase. LOS: Explain the fundamental relationship among saving, investment, the fiscal balance, and the trade balance. Pages 222\u2013226. The difference between savings and investment is equal to the fiscal balance plus the net exports. If there is an imbalance between income and expenditures, the real rate of interest changes so that expenditures and income are equal. Notes to the presenter: This relationship can be viewed from many perspectives (government policies, trade policies, investment incentives). Question for discussion: Suppose the government operates at a deficit (that is, G > T). What may happen? Answer: The deficit may fall on the trade balance, on the difference between investment and savings, or both. The globalization of financial markets ensures that private savings would not necessarily equal domestic investment and government borrowing, so any fiscal policy may affect either the trade balance or investment less savings\u2014likely both. Copyright \u00a9 2014 CFA Institute.", "Image XResolution": "37", "Image YResolution": "37", "Image ResolutionUnit": "Pixels/Centimeter", "Image Software": "SlidePlayer", "Image YCbCrPositioning": "Centered"}