I have no idea what the book is talking about here, can someone please explain this to me?
I don’t have the reading so I’m not sure but, the savings-investment balance equates to the current account balance (excess saving leads to a surplus and vice versa) It is derived from the national accounting identity: Y=C+I+(X-M) …Excluding G for simplicity sake here. where Y= income C= consumption I=investment X=exports M=imports i.e. (X-M) is the external imbalance So if the difference between income and consumption (Y-C) is savings (S) then: Y-C=I+(X-M) or S=I+(X-M) thus S-I=(X-M) In other words, the savings investment imbalance is the cause of any open economy’s external (current account) imblance. I’'m guessing that this waas what you were talking about?
Y=C+S+I+(X-M) also Y = C + S + T S = Private Savings G = Govt Savings So S+T = G+I+(X-M) or S-G = (I-T) + (X-M) Private - Govt Savings = (Investment less Taxes) + (Exports - Imports)
Crazy stuff I’m looking at here. So what happens when there’s an imbalance? Savings > Investment or Investment > Savings.
Thanks for your posts. Actually, I think it’s just saying that if investment>savings then currency will appreciate. This explains what has happened in the US . . . .
Not explaining via formula…, how does it make sense that if investment is higher than savings, currency will appreciate? What’s the connection in economic terms? Relatively higher savings rate will depreciate the currency? Is investment not the same thing as spending/consumption? Because if investment is the same thing as consumption, then high consumption will enable the economy to grow and boom via higher aggregate demand, which will lead to currency depreciation as opposed to appreciation. No?
I dont have my book here either but I agree with Damil: doesn’t savings need to be greater than investment for there to be a currency appreciation? This would mean exports would be greater than imports causing a demand for the currency, correct?
it is explained by formula too (S-G) - (I-T) > 0 would mean Savings and Investment have a positive imbalance This is equal to (X-M) -> Exports > Imports then. So the two would need to be matched. And Exports > Imports causes demand for the currency - hence appreciation.
I also had some initial confusion when I did this reading because it isn’t very clearly explained in the book. I think that all they are trying to say is that if there is an imbalance with domestic saving/investing that foreign capital will flow into the country correcting the imbalance and this inflow will put upward pressure on the currency. I don’t think you need to know any formula, just the concept.