National saving

This article is about the economic term. For the United Kingdom government-run savings institution previously known as National Savings, see National Savings and Investments.

In economics, a country's national savings is the sum of private and public savings. It is generally equal to a nation's income minus consumption and government purchases.

Economic model of national savings

In this simple economic model with a closed economy there are three uses for GDP, (the goods and services it produces in a year). If Y is national income (GDP), then the three uses of C consumption, I investment, and G government purchases can be expressed as:

• $Y=C+I+G$

National savings can be thought of as the amount of remaining money that is not consumed, or spent by government. In a simple model of a closed economy, anything that is not spent is assumed to be invested:

• ${\text{National Savings}}=Y-C-G=I$

National savings should be split into private savings and public savings. A new term, T is taxes paid by consumers that goes directly to the government as shown here:

• $(Y-T-C)+(T-G)=I$

(Y - T) is disposable income. (Y - T) less consumption (C) is private savings. The term (T - G) is government revenue through taxes, minus government expenditures, which is public savings, also known as the Budget surplus.

• $S=I(r)$

The interest rate plays the important role of creating an equilibrium between saving and investment.

In open economy model (balanced public spendings)

NX = Net eXports = eXports - iMports

NX = (X-M)

NX=Y-(C+I+G)=Y-Domestic demand

Y=C+I+G+NX = National accounts identity

Y-C-G= S =I+NX

S=I+NX = National savings

S-I = The portion of national savings not used to finance domestic investment = NX = Trade balance

In open economy model (public deficit or surplus)

(1) Y = C + I + G + (X - M) = National accounts identity

(2) Yd = Y - TAX + TR = Disposable income depending on aggregated demand, taxes and transfers

(3) Yd = S + C = Disposable income depending on savings and consumption

→ (2),(3) S + C = Y - TAX + TR

(4) Y = S + C + TAX – TR = Aggregated demand

→ (1),(4) C + I + G + (X – M) = S + C + TAX – TR

(5) S = (X - M) - (TAX - TR – G) + I = National savings

[ S - I + (TAX - TR – G) = The portion of national savings not used to finance domestic investment and public deficit = (X - M) = Trade balance ]

See also

• Government debt
• Inflation
• IS/LM model
• Sectoral balances