S = I

Definition

The national saving and investment identity, denoted as S = I, states that the total national saving in an economy is equal to the total national investment. This fundamental macroeconomic relationship reflects the balance between the supply of savings and the demand for investment in the economy.

5 Must Know Facts For Your Next Test

1. The S = I identity is a fundamental macroeconomic relationship that holds true in a closed economy with no government sector.
2. This identity reflects the fact that every dollar saved must be matched by a dollar of investment, as savings are the source of funds for investment.
3. The S = I identity is an accounting identity, meaning it is true by definition and must hold true in any given economy.
4. Deviations from the S = I identity can occur in open economies due to international capital flows, or in economies with a government sector.
5. The S = I identity is a crucial concept in understanding the determination of national income and the role of saving and investment in the macroeconomy.

Review Questions

• Explain the relationship between national saving and national investment as expressed by the S = I identity.
  • The S = I identity states that the total national saving in an economy is equal to the total national investment. This relationship reflects the fact that every dollar saved must be matched by a dollar of investment, as savings provide the funds for investment spending. The S = I identity is an accounting identity, meaning it must hold true by definition in any given economy. This fundamental macroeconomic relationship is a crucial concept in understanding the determination of national income and the role of saving and investment in the macroeconomy.
• Describe how deviations from the S = I identity can occur in open economies and economies with a government sector.
  • In an open economy, the S = I identity can be modified to include international capital flows, such that S = I + (X - M), where (X - M) represents net exports. In this case, national saving may not equal national investment due to the ability to borrow or lend from/to other countries. Similarly, in an economy with a government sector, the S = I identity can be expanded to include government saving and investment, such that S + T - G = I, where T represents tax revenue and G represents government spending. Deviations from the basic S = I identity can occur in these more complex economic models, but the fundamental relationship remains an important macroeconomic concept.
• Analyze the implications of the S = I identity for the determination of national income and the role of saving and investment in the macroeconomy.
  • The S = I identity is a crucial concept in understanding the determination of national income and the role of saving and investment in the macroeconomy. Since every dollar saved must be matched by a dollar of investment, the level of national saving and national investment play a pivotal role in determining the level of national income. Changes in saving or investment can lead to adjustments in interest rates, output, and employment as the economy works to restore the balance between saving and investment. Additionally, the S = I identity highlights the interdependence between the financial and real sectors of the economy, as the supply of savings influences the demand for investment and vice versa. Analyzing the implications of this identity is essential for understanding macroeconomic equilibrium and the factors that drive economic growth and stability.

Related terms

National Saving:

The total amount of income in an economy that is not consumed, but rather set aside for future investment or consumption.

National Investment: The total amount of spending on capital goods, such as machinery, equipment, and structures, that are used to produce other goods and services.

Equilibrium:

The state in which the supply of savings equals the demand for investment, resulting in a balance between the two.