MacroEconomics

Ummad Mazhar, PhD

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Session 5: Roadmap

• How are savings measured? In a closed economy? In an open

economy?
– using national income accounting framework

• How macroeconomists define investment?

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Quick Recap (Importance of savings in growth)

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 Savings and investments in national income accounts

• We know Y = C + I + G

• Focusing on closed economy (i.e., without any international trade) we can see the
accounting definition of national savings

• The term (Y - C - G) is called national saving OR the total income in the

economy that remains after paying for consumption and government
purchases

• (5.1)
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• Rational agents don’t keep idle money balances
• They deposit them in bank
• OR put them in stocks or bonds

• We can thus write I = Y – C – G

• OR S=I (2)

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• Note: In macroeconomics, investment refers to the purchase of
new capital, such as equipment or buildings

• If an individual spends less than she earns and uses the rest to
buy stocks or mutual funds, economists call this saving

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• Government expenditures are financed from taxes
• T – G or Tax Revenue – Government Expenditures = Budget balance
• T – G > Government Saving or Budget surplus
• T – G < Government dissaving or budget deficit

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• S = ( Y – C – T ) + (T – G)
• The first part (Y – C – T) is called private saving and the second (Y – G)
is called public saving
• Private saving: the income that households have left after paying for
taxes and consumption
• Public saving: the tax revenue that the government has left after paying
for its spending
• S(national) = S(private) + S(govt) (3)

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Budget Deficit as percentage of GDP in Pak

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Application: National saving and investment
in SBP Annual Report

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 Savings and investment in an open economy
• An open economy can experience capital inflow or outflow from abroad

• NCI = IM – X

• So we can write

• Investment = National Savings + Net capital inflow

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Pakistan’s national accounts again

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Activity 1

• Suppose GDP is $8 trillion, taxes are $1.5 trillion, private saving is $0.5
trillion, and public saving is $0.2 trillion. Assuming this economy is closed,
calculate consumption, government purchases, national saving, and
investment.

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 Activity 2
• Economists in Funlandia, a closed economy, have collected the following
information about the economy for a particular year:
• Y = 10,000
• C = 6000
• T = 1500
• G = 1700
• Investment function is estimated as
• where r is the country’s real interest rate, expressed as a percentage.
Calculate private saving, public saving, national saving, investment, and
the equilibrium real interest rate.

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Activity 3

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See you next time

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