Explain why private national saving plus government saving equals the current account of the balance of payments

Question

What will be an ideal response?

Answer 1

Saving is the difference between the income of an entity and what that entity consumes. In a closed economy, the value of what is produced, the country's gross domestic product or GDP, must equal its expenditures and its income. Thus, investment expenditures must be financed by national savings. In the case of an open economy, this does not have to be the case. By definition, national savings are equal to national income minus the consumption of the private (C) and public sectors (G):
National savings = Gross national income – Consumption of the private and public sectors
Symbolically,
S = GNI – C – G

We know that gross national income is GDP plus net foreign income, so
S = GDP + NFI – C – G

Substituting the components of GDP gives
S = C + I + G + NX + NFI – C – G

Upon canceling out the consumption terms and rearranging terms, we find
S – I = NX + NFI = CA
National saving – National investment = Current account

If a country's purchases of investment goods are more than its savings, the country must run a current account deficit; that is, the country's investment spending must be financed from abroad with a capital account surplus.