Principles of Economics- Mankiw (5th) 544

Principles of Economics- Mankiw (5th) 544 - 562 PA R T N I...

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562 PART NINE THE REAL ECONOMY IN THE LONG RUN Because a closed economy does not engage in international trade, imports and exports are exactly zero. Therefore, net exports ( NX ) are also zero. In this case, we can write Y ± C ² I ² G. This equation states that GDP is the sum of consumption, investment, and gov- ernment purchases. Each unit of output sold in a closed economy is consumed, in- vested, or bought by the government. To see what this identity can tell us about financial markets, subtract C and G from both sides of this equation. We obtain Y ³ C ³ G ± I. The left-hand side of this equation ( Y ³ C ³ G ) is the total income in the economy that remains after paying for consumption and government purchases: This amount is called national saving, or just saving, and is denoted S. Substituting S for Y ³ C ³ G, we can write the last equation as S ± I. This equation states that saving equals investment. To understand the meaning of national saving, it is helpful to manipulate the definition a bit more. Let
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