Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 31 - Part XI - Open-Economy Macroeconomics: Basic Concepts - Questions for Review - Page 679: 2

Answer

Acquiring investments means to spend on capital equipment, inventories, and structures. This also includes new housing purchases by households. Saving usually means to deposit money at a financial institution. Net capital outflow is the difference between the purchase of foreign assets by domestic residents, less the purchase of domestic assets by foreigners.

Work Step by Step

We know that GDP is the sum of consumption (C), investment (I), government spending (G), and net exports (NX). $GDP = C + I + G + NX$ $GDP - C - G = C + I + G + NX - C - G$ $GDP - C - G = I + NX$ We also know that saving is $GDP - C - G$, so we can say that saving is the sum of investments and net exports. $S = I + NX$ We also know that net exports is the same as net capital outflow, so we can say savings is the sum of domestic investment and net capital outflow. $S = I + NCO$
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