Savings and Investment Growth of an economy is dependent on its investment to

Savings and investment growth of an economy is

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Savings and Investment Growth of an economy is dependent on its investment to increase productive capacity [stock of capital] . National savings determines a country's ability to invest in new capital goods Macroeconomic equilibrium in the goods & service market is attained with total investments equal total savings Start with the definition of production and income for the economy :: Y = C + I + G + (X IM) I = [Y C G] + (IM X) = (Y C T) + (T G) + (IM X) Investment = Private Saving + Govt Saving + Foreign Saving Biz Savings + Household Savings Capital Inflow I = (Y C T)+(T G) + (IM X) = Private_Saving+Govt_Saving + Foreign_Saving Domestic Investment = Domestic Saving + Foreign Saving
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Circular Flow of Income including Government, Financial Market and ROW FIRMS HOUSE HOLDS Owners of resources Users of resources Product Markets Factor Markets Producers Consumers Factor Payment Income (Y) Savings Consumption (C) Government Budget Surplus (T-G) Government Purchase (G) Income Taxes(T H ) Investments (I) Rest of World Exports (X) Imports (IM) Firm Revenues C + I + G + X Trade Deficit (IM-X) Indirect Taxes(T I ) Financial Markets
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T-Account for Sectors FIRMS HOUSEHOLDS GOVERNMENT EXTERNAL (ROW) CAPITAL MKT Expd Recpt Expd Recpt Expd Recpt Expd Recpt Expd Recpt Y H C C Y H G IndTax X IM I S B IndTax I IncTax IncTax S H IM G S G X S R S B S H S G S R TOTE B TOTR B TOTE H TOTR H TOTE G TOTR G TOTE R TOTR R I S Total Investments = Total Savings Y H : Income to Households (Wages, Profits, Rentals) IndTax: (Net) Indirect Taxes; IncTax : Income Tax (Tax on profit, tax on wages,…) IM : Imports X : Exports S B : Business Savings = Undistributed Profits S H : Households’ Savings S G : Government Budget Surplus = Government Saving S R : Saving of Rest of the World (ROW) = Capital Inflow Production Consumption Accumulation A condition for macroeconomic equilibrium
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