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💵principles of macroeconomics review

I = I_d

Written by the Fiveable Content Team • Last updated August 2025
Written by the Fiveable Content Team • Last updated August 2025

Definition

The term 'I = I_d' refers to the national saving and investment identity, which states that the total amount of investment (I) in an economy is equal to the total amount of domestic investment (I_d). This identity is a fundamental concept in macroeconomics that helps understand the relationship between national saving and investment.

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5 Must Know Facts For Your Next Test

  1. The national saving and investment identity is a fundamental macroeconomic concept that helps explain the relationship between national saving and investment.
  2. The identity states that the total amount of investment (I) in an economy is equal to the total amount of domestic investment (I_d).
  3. This identity is derived from the national income accounting equation, which states that GDP is equal to the sum of consumption, investment, government spending, and net exports.
  4. The identity holds true because any saving that is not used for domestic investment must be used for foreign investment, and any foreign investment must be financed by national saving.
  5. The identity is important for understanding the role of national saving in determining the level of investment and economic growth.

Review Questions

  • Explain the relationship between national saving and domestic investment as described by the identity I = I_d.
    • The identity I = I_d states that the total amount of investment (I) in an economy is equal to the total amount of domestic investment (I_d). This means that all national saving is used for domestic investment, and there is no net foreign investment. The identity holds true because any saving that is not used for domestic investment must be used for foreign investment, and any foreign investment must be financed by national saving. This relationship is a fundamental concept in macroeconomics and helps explain how national saving and investment are related.
  • Describe how the national saving and investment identity is derived from the national income accounting equation.
    • The national saving and investment identity, I = I_d, is derived from the national income accounting equation, which states that GDP is equal to the sum of consumption, investment, government spending, and net exports. Specifically, the identity is derived by rearranging the national income accounting equation to show that the total amount of investment (I) is equal to the total amount of domestic investment (I_d). This relationship is important because it helps explain how national saving and investment are related and how they contribute to economic growth.
  • Analyze the implications of the national saving and investment identity for economic policy and growth.
    • The national saving and investment identity, I = I_d, has important implications for economic policy and growth. If national saving is insufficient to finance domestic investment, the identity implies that the country must rely on foreign investment to finance its investment needs. This can make the economy more vulnerable to external shocks and reduce the country's ability to control its own economic destiny. Conversely, if national saving is high, the identity suggests that the country can finance its own investment and potentially experience higher economic growth. Policymakers can use this identity to understand the relationship between national saving and investment and design policies that promote economic growth, such as encouraging higher national saving or improving the efficiency of domestic investment.
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