The relationship between GDP (Y) and its components is given by:
In a closed economy, net exports (NX) are zero:
Rearranged, investment spending on the part of businesses is:
Private saving is equal to what households retain of their income after paying taxes (T) and consumption (C). Households also receive income in the form of transfer payments (TR):
We refer to government saving as public
saving. It is what remains of tax revenue (T) after the government pays transfers (TR) and conducts purchases (G). When public saving is negative, there is a budget deficit. When the value of public saving is positive, there is a budget surplus. Public saving is given by:
Investment equals private savings plus public savings:
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