<p>In a closed economy, savings equal investment. Your equation actually shows this. We have:</p>

<p><span class="math-container">$Y−(C+G) - I = 0$</span>.</p>

<p>Note that savings, by definition, is just equal to the production <span class="math-container">$Y$</span> that is not consumed. Here we have consumption by private citizens <span class="math-container">$C$</span> and consumption by the Government <span class="math-container">$G$</span>. Therefore, savings <span class="math-container">$S$</span> is:</p>

<p><span class="math-container">$S = Y - (C+G)$</span> </p>

<p>and therefore:</p>

<p><span class="math-container">$S=I$</span></p>

<p>So national savings can only be zero if investment is zero.</p>

<p>Here is a concrete example. You don't spend all your income and save money in a bank. People who want to invest (e.g. to start a business or buy a tractor) go and borrow that money, which is then invested.</p>

<p>In an open economy, there is no reason for savings to equal investment. Nevertheless, the two are often strongly correlated in reality, which is known as the <a href="https://www.dummies.com/education/finance/international-finance/the-feldsteinhorioka-international-finance-puzzle/" rel="nofollow noreferrer">Feldstein-Horioka Puzzle</a>. This is/was one of the major puzzles in international economics and a large literature has been devoted to explaing it.</p>

CC BY-SA 4.0
2018-09-27T09:23:28.557Z
2018-09-27T09:23:28.557Z
BB King
<p><strong>Context:</strong></p>

<p><span class="math-container">$Y -(C+I+G) = X - M$</span></p>

<p>In a closed economy, <span class="math-container">$(X-M) = 0$</span></p>

<p><em>Notations</em></p>

<p>Y --> Income/Output</p>

<p>C,I,G --> Consumption, Investment and Government expenditure respectively.</p>

<p>X --> Exports</p>

<p>M --> Imports</p>

<p><strong>I want an economic intuition how is it possible that aggregate of all savings in a closed economy equals 0.</strong></p>

CC BY-SA 4.0
2018-09-26T18:26:30.797Z
Your identity actually shows that aggregate savings is equal to investment. Unless investment is zero, there is no reason for you to have zero savings, as per your identity.
erik
CC BY-SA 4.0
2018-09-27T02:30:26.447Z
Please elaborate and give a conceptual understanding. So what happens in an open economy Savings does not equal Investment.
DrStrangeLove
CC BY-SA 4.0
2018-09-29T01:44:57.203Z
I think @BB King’s answer below answers everything you asked.
erik
<macroeconomics><international-trade><international-economics><national-income>
Does National Savings equal zero in a closed economy? Please give an economic intuition
DrStrangeLove
# Does National Savings equal zero in a closed economy? Please give an economic intuition

(Asked by: username_0 on 2018-09-26)

**Context:**

$Y -(C+I+G) = X - M$

In a closed economy, $(X-M) = 0$

*Notations*

Y --> Income/Output

C,I,G --> Consumption, Investment and Government expenditure respectively.

X --> Exports

M --> Imports

**I want an economic intuition how is it possible that aggregate of all savings in a closed economy equals 0.**

**Tags:** macroeconomics, international-trade, international-economics, national-income

> **Comments:**
> **username_1**: Your identity actually shows that aggregate savings is equal to investment. Unless investment is zero, there is no reason for you to have zero savings, as per your identity.  
> **username_0**: Please elaborate and give a conceptual understanding. So what happens in an open economy Savings does not equal Investment.  
> **username_1**: I think @username_2’s answer below answers everything you asked.  

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## 1 answers

### Answer by username_2 on 2018-09-27. Score: 3

In a closed economy, savings equal investment. Your equation actually shows this. We have:

$Y−(C+G) - I = 0$.

Note that savings, by definition, is just equal to the production $Y$ that is not consumed. Here we have consumption by private citizens $C$ and consumption by the Government $G$. Therefore, savings $S$ is:

$S = Y - (C+G)$

and therefore:

$S=I$

So national savings can only be zero if investment is zero.

Here is a concrete example. You don't spend all your income and save money in a bank. People who want to invest (e.g. to start a business or buy a tractor) go and borrow that money, which is then invested.

In an open economy, there is no reason for savings to equal investment. Nevertheless, the two are often strongly correlated in reality, which is known as the [Feldstein-Horioka Puzzle](https://www.dummies.com/education/finance/international-finance/the-feldsteinhorioka-international-finance-puzzle/). This is/was one of the major puzzles in international economics and a large literature has been devoted to explaing it.


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