Skip to content
Sem 5 Prep
← Money & BankingSaving, investment and the financial system

Formulas for this chapter

Private saving

Private saving = Y - T - C

When the question gives income, taxes and consumption. If it gives a deficit or surplus instead of taxes, get T out of that first.

Y
National income or GDP for the period
T
Tax revenue collected by the government
C
Household consumption spending

Public saving, surplus and deficit

Public saving = T - G Budget surplus = T - G Budget deficit = G - T = -(public saving)

Whenever the question mentions a surplus or a deficit. Convert it to public saving with the correct sign before using it anywhere else.

T
Tax revenue
G
Government purchases of goods and services

National saving

National saving = private + public = (Y - T - C) + (T - G) = Y - C - G

The short form Y − C − G is fastest, and it never needs taxes. Use the long form as the cross-check.

Y
National income or GDP
C
Household consumption
G
Government purchases

National income accounting identity

Y = C + I + G + NX Closed economy: Y = C + I + G, so I = Y - C - G Open economy: I = Y - C - G - NX

Read the question for the word closed. If the economy is open or NX is given, the closed-economy shortcut is wrong.

I
Investment, that is, spending on new capital
NX
Net exports: exports minus imports, negative for a trade deficit
Step 1 of 22
The ideaTheory

A pipe between two rooms

Imagine two rooms. In one, people have money they do not need this month. In the other, people have a use for money they do not have.

A financial system is the set of pipes between those two rooms. Banks are one pipe. The stock market is another.

Nothing is created in the pipe. It only moves. That single sentence explains why the arithmetic in this chapter always balances: what one side saves, the other side borrows and spends.

← BackContinue →