Week 9 Discussion

“A nation that does not save enough-a low national saving rate – tends to face an external (CA)
deficit, whereas a nation with a high saving rate should face an external surplus.” Evaluate. Your
answer should employ mathematical relationships. WORDS ALONE will not be enough.

Ans.
(Y + NI – T) - C = I + (G – T) + (NX + NI) --------------------- 1
(Y + NI – T) = Disposable income --------------------- 2
So, the left side in equation 1 is equal to Disposable income minus consumption (i.e., private
saving, S).
(NX + NI) = Current Account (CA) --------------------- 3
Equation 3 shows the sum of net exports and net income from abroad which is equal Current
Account.
So, we can rewrite equation one and denote CA as:
S = I + (G – T) + CA
Rewriting it to read:
CA = S + (T – G) - I
The above equation highlights a relation between national savings and investments.
The current account balance is equal to saving (public and private) minus investment. A Current
Account Surplus indicates that the country’s saving is more than invests. This implies net
lending from the country to the rest of the world. On the other hand, a Current Account deficit is
when the country is saving less than it invests. This implies net borrowing by the country from
the rest of the world.
If a country invests more than it saves, the S + (T – G) - I is negative. This implies the country
must be borrowing the difference from the rest of the world, and must therefore be running a
current account deficit. On the same ground, if a country saves more than it invests, the S + (T –
G) - I is positive implying the country must be lends to the rest of the world and is therefore
running a current account surplus.