Wednesday, July 4, 2012

The Borne-Out Identity: Savings and Investment

One of the most well-known and oft troted out identities in economics is the identity that says savings = investment. This identity can be derived in a simple manner as J.M. Keynes did in the second chapter of the General Theory:

Income = Consumption + Investment 

Savings = Income - Consumption 

Therefore Savings = Investment

For fun, I ran gross private savings in the US against gross private investment. 

Notice that at times private savings exceeds investment, and other times vice-versa. This is because there are other types of saving and investment other than "private." Government budget surpluses are public savings and deficits are public dissavings, while foreign capital inflows (or outflows) allow for private investment to exceed (or under-exceed) private savings. 

By looking at discerepencies between these two lines, we can see patterns in these trends for the US; notice how private savings exceeds investment in in the early 90's but falls below at the end of the 90's, when the budget surplus added public savings. 

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