# fiscal deficit

A fiscal deficit (G-T>0) implies that the private sector must save more than it invests (S-I>0) or the country must run a trade deficit (X-M<0).

help please. dont get it.

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Remind yourself of the following macroeconomic equation that always has to hold (in an open economy):

X-M=(S-I)+(T-G)

You can re-arrange:

G-T=(S-I)-(X-M)

If G-T>0, then S-I>0 or X-M<0 (because of the negative sign in front of it).

Reading 17, 3.1. Aggregate Demand, in case you want to check it out in the curriculum.

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so if G-T<0, i would have to take the reverse of the above?

looks like i have to take it as it is. memorize the equation and move on. cos it still doesnt really make much sense.

Let’s put in some numbers:

Let’s say G=10 and T=9 so G-T=1>0.

Let’s further assume that S=10 and I=10, so S-I=0. Imagine now that X=5 and M=5 so X-M=0. Then the equation would not hold because:

10-9=(10-10)-5-5)

1=0

which cannot be.

Thus it must be the case that either X-M=-1 or S-I=1.

Put it some numbers and see what happens for G-T<0

Hi,

I have been facing the same issue: I am actually using wiley books, where i found this “U

sing the formulaG–T= (S–I) – (X–M) shows that a budget deficit is financed through either higher domestic saving (S), lower business investment (I), or borrowing from foreigners (X–M). Private saving is given by”I personnaly thing that if a country had a fiscal deficit, it should exports more than it imports so it can generate some cash to cover the deficit, but the quote says the opposite. CAN YOU HELP ME PLEAAAASE!!!

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You have to look at it in terms of capital and current account. A current account deficit (trade deficit) means a surplus in your capital account. A surplus in you capital account means that you are effectively borrowing funds from foreigners (net capital inflows). This inflow of capital helps fund the government deficit.