National saving

In economics, a country's national saving is the sum of private and public saving. It equals a nation's income minus consumption and the government’s taxes levied.

Economic model

Closed economy with public deficit or surplus possible

In this simple economic model with a closed economy there are three uses for GDP (the goods and services it produces in a year). If Y is national income (GDP), then the three uses of C consumption, I investment, and government purchases can be expressed as:

$Y=C+I+G$

National saving can be thought of as the amount of remaining income that is not consumed, or spent by government. In a simple model of a closed economy, anything that is not spent is assumed to be invested:

${\text{National Saving}}=Y-C-G=I$

National saving should be split into private saving and public saving. The new terms, T is taxes paid by consumers that goes directly to the government and TR is transfers paid by the government to the consumers as shown here:

$(Y-T+TR-C)+(T-G-TR)=I$

(Y − T + TR) is disposable income whereas (Y − T + TR − C) is private saving. Public saving, also known as the budget surplus, is the term (T − G − TR), which is government revenue through taxes, minus government expenditures, minus transfers.

The interest rate plays the important role of creating an equilibrium between saving and investment in neoclassical economics.

$S(r)=I(r)$

In Keynesian models the identity between saving and investment is generated by the investment who determines income and by this the saving in the economy.

Open economy with balanced public spending

In an open economic model international trade is introduced into the model. Therefore the current account is split into export and import:

${\text{Net eXports}}=NX={\text{eXports}}-{\text{iMports}}=X-M$

The net exports is the part of GDP which is not consumed by domestic demand respectively the domestic demand which is not covered by the domestic production (GDP).

$NX=Y-(C+I+G)=Y-{\text{Domestic demand}}$

If we transform the identity for net exports by subtracting consumption, investment and government spending we get the national accounts identity:

$Y=C+I+G+NX$

The national saving is the part of the GDP which is not consumed or spent by the government respectively the invested or net exported.

$Y-C-G=S=I+NX$

It is important to note that S is here only private saving. Because of the balanced public spendings condition public savings equals zero

Therefore the difference between the national saving and the investment is equal to the net exports:

$S-I=NX$

Open economy with public deficit or surplus

In addition to the model above the government budget is directly introduced into the model. We consider now an open economic model with public deficits or surpluses. Therefore the budget is split into revenues these are the taxes (T) and the spendings there are transfers (TR) and government spendings (G). Revenue minus spending results in the public saving:

$S(G)=T-G-TR$

The disposable income of the households is the income Y minus the taxes plus the transfers of the state.

$Yd=Y-T+TR$

Respectively the disposable income can only be used for saving or for consumption.

$Yd=C+S(P)$

Therefore the private saving in this model equal the disposable income of the households minus consumption.

$S(P)=Yd-C$

By this equation the private saving can be written as:

$S(P)=Y-T+TR-C$

And the national accounts as:

$Y=S(P)+C+T-TR$

Once this equation is used in Y=C+I+G+X-M we get:

$C+I+G+(X-M)=S(P)+C+T-TR$

In one transformation we get the determination of net exports and investments by private and public saving

$S(P)+S(G)=I+(X-M)$

In another transformation we get the sectoral balances of the economy as developed by Wynne Godley. This corresponds approximately to Balances Mechanics developed by Wolfgang Stützel.

$(S(P)-I)+S(G)=(X-M)$

References

Economic model

Closed economy with public deficit or surplus possible

Open economy with balanced public spending

Open economy with public deficit or surplus

See also

References