Question

In an economy open to international trade ________.

A) saving equals investment in equilibrium
B) saving is the difference between net exports and investment
C) saving equals investment as long as the economy has no exports
D) saving equals investment as long as NX

Answer 1

Answer: D) saving equals investment as long as NX = 0

Step-by-step explanation:

The last option was incomplete as it should have said ...NX = 0.

The Income/GDP of a country that is open to international trade is calculated as follows:

Income = Consumption + Investment + Government spending + Net exports

Y = C + I + G + NX

If NX = 0 then the formula becomes:

Y = C + I + G

Investment in this scenario is therefore:

I = Y - C - G

This is the same as savings as savings is calculated by subtracting consumption and government spending from the total income. This is because government spending is derived from taxes so the cash that people get to save is their income less than their taxes and consumption expenses.

S = Y - C - G = Y