Saving and net flows of capital and goods In a closed economy, saving and investment must be equal, but this is not the case in an open economy. In the following problem, you will explore how saving and investment are connected to the international flow of capital and goods in an economy. Before delving into the relationship between these various components of an economy, you will be asked to recall some relationships between aggregate variables that will be useful in your analysis. Recall the components that make up GDP. National income (Y) equals total expenditure on the economy's output of goods and services. Thus, where C consumption, I investment, G government purchases, X- exports, M imports, and NX net exports: Also, national saving is the income of the nation that is left after paying for Therefore, national saving (S) is defined as: Rearranging the previous equation and solving for Y yields Y Plugging this into the original equation showing the various components of GDP results in the following relationship:

The total of private and public saving constitutes a nation's national saving in terms of economics. It is the same as a country's income less its government spending and consumption. There are three purposes for GDP in this basic closed-loop economic model (the goods and services it produces in a year). Y=C+I+G is a formula that can be used to express the three uses of C consumption, I investment, and G government purchases if Y equals national income (GDP). The amount of money that is left over after consumption and government spending can be considered national saving. Both private and public savings are included in national saving. In neoclassical economics, the interest rate is crucial in setting a balance between saving and investment.

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