CHAPTER 25 SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 561 (denoted as Y ) is divided into four components of expenditure: consumption ( C ), investment ( I ), government purchases ( G ), and net exports ( NX ). We write Y ± C ² I ² G ² NX. This equation is an identity because every dollar of expenditure that shows up on the left-hand side also shows up in one of the four components on the right-hand side. Because of the way each of the variables is defined and measured, this equa-tion must always hold. In this chapter, we simplify our analysis by assuming that the economy we are examining is closed. A closed economy is one that does not interact with other economies. In particular, a closed economy does not engage in international trade in goods and services, nor does it engage in international borrowing and lending. Of course, actual economies are open economies —that is, they interact with other economies around the world. (We will examine the macroeconomics of open economies later in this book.) Nonetheless, assuming a closed economy is a useful
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