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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
I
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
C
G
I.
The lefthand side of this equation (
Y
C
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
C
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
T
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 Spring '10
 abijian
 Macroeconomics, Public Finance, national saving

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