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Main content
Current time:0:00Total duration:3:26
AP.MACRO:
MKT‑4 (EU)
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MKT‑4.B (LO)
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MKT‑4.B.1 (EK)
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MKT‑4.B.2 (EK)

Video transcript

in this video we are going to use the GDP equation that we have seen before to think about how national savings relates to investment and really it's a way to algebraically manipulate things to ensure that it fits with our intuition so another way to think about GDP is it's the same thing as national income which we denote with a capital letter Y and GDP or national income we can account for it by saying hey that's going to be the sum of consumption plus investment plus government spending in a closed economy we could also think about an open economy where you have net exports right over here let's just focus on a closed economy for now so let me actually just label this we're gonna deal with a closed closed economy in a future video I will open the economy up well how could we solve for savings well what happens if we subtract consumption and government spending from both sides of this equation well then you're gonna have national income minus consumption minus government spending is equal to investment now what is another way of thinking about this left-hand side of this equation so at a national level this is the income minus how much is being consumed and how much the government - spending so it's income minus the different types of spending well you could view this as national savings national savings and we see here this identity that national savings which is often denoted with a capital S is equal to investment and if that isn't intuitive for you at first just think about it at a kind of a human scale if I am saving things and I am putting it into a bank that Bank will then lend that money that can be used for investment and we can break this down even more if we want to think about taxes so let's just say t is equal to taxes so let's just think about the private economy first so if we think about the national income - consumption spending and folks have got to pay their taxes so - taxes and then where do those taxes go well they go to the government so they stay in the economy so notice I'm not changing this equation I'm just subtracting taxes and then adding taxes and then I subtract from that government spending these two equations are equivalent and this is going to be equal to our investment in our closed economy now if you look at this left-hand side right over here you could view this as private savings this is the national income - how much is being consumed - how much is being paid to the government so this is private private savings and if you look at the second part the taxes the government gets - how much of the government spends this you could view as public savings public savings in most countries this is neutral - negative so it's actually the public savings are negative because the government bends more than the amount of revenue gets in taxes but either way you could see the t minus G would be the public savings and you add public savings and private savings together you get national savings
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