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Question on "National Frugality"

 
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Question on "National Frugality" Can't Post
Economists often make one believe that Trade is a Zero sum game, and that ,if the Chinese sell us toys we sell Aircrafts to the Saudis and Saudis in turn sell oil to the Chinese.

In this context, I have a hypothetical question which I have often pondered. Would be glad if some of the Gurus comment. We often hear that the US has a negative savings rate compared to some countries, some which have 30 to 40 percent . I would like to know what effect will a high savings rate in the US have on the dollar and/or the economic/political/cultural hegemony of the US. In particular , I am interested to know how "flight" of these savings in the form of international funds to other emerging/developing economy affects the US in the medium or long term.

bhai49
New User

Jun 13, 2007, 7:23 PM

Post #1 of 2 (1187 views)

Re: [bhai49] Question on "National Frugality" [In reply to] Can't Post
I do'nt think we operate in a closed system so trade is in practice not a zero sum game IMO.


Pertaining to savings question, saving = investment.

Let me explain; the regular GDP model is Y = C + I + G + NX

Breaking it down we also know that Y (output) = C (consumption) + I (Investment)

Income is allocated to either C or S (Private Savings) = Y = S+C

C + I = Y = C + S

You get

I = Y - C = S

Investment equals spending.

We, however, want to relate S and C to something else, where you actually can consume and spend, that is from your YD (disposable income).

YD = Y + TR (transfers to the private sector) - TA (all taxes)

YD = C+S

C+S = YD = Y = TR - TA or C = YD - S = Y + TR - TA - S

Consumption is TD - Savings. Or put it another way, C = income plus transfers less taxes and savings.

From here: C = YD - S = Y + TR - TA - S Let's put C back in

S-I = (G +TR -TA) + NX (here is where your net exports comes into play again).

What you find is that excess savings in the private sector over investment is equal to the gvoernment deficit plus the trade surplus. So privates savings has an impact on investment, national budget, and the net exports.

Hope that isn't too confusing.

econmod
Broker / Moderator

Jun 15, 2007, 12:30 PM

Post #2 of 2 (1147 views)

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