A fiscal deficit (G-T>0) implies that the private sector must save more than it invests (S-I>0) or the country must run a trade deficit (X-M<0).
help please. dont get it.
Remind yourself of the following macroeconomic equation that always has to hold (in an open economy):
X-M=(S-I)+(T-G)
You can re-arrange:
G-T=(S-I)-(X-M)
If G-T>0, then S-I>0 or X-M<0 (because of the negative sign in front of it).
Reading 17, 3.1. Aggregate Demand, in case you want to check it out in the curriculum.
so if G-T<0, i would have to take the reverse of the above?
looks like i have to take it as it is. memorize the equation and move on. cos it still doesnt really make much sense.
Let’s put in some numbers:
Let’s say G=10 and T=9 so G-T=1>0.
Let’s further assume that S=10 and I=10, so S-I=0. Imagine now that X=5 and M=5 so X-M=0. Then the equation would not hold because:
10-9=(10-10)-5-5)
1=0
which cannot be.
Thus it must be the case that either X-M=-1 or S-I=1.
Put it some numbers and see what happens for G-T<0
Hi,
I have been facing the same issue: I am actually using wiley books, where i found this "Using the formula G – T = (S – I) – (X – M) shows that a budget deficit is financed through either higher domestic saving (S), lower business investment (I), or borrowing from foreigners (X – M). Private saving is given by"
I personnaly thing that if a country had a fiscal deficit, it should exports more than it imports so it can generate some cash to cover the deficit, but the quote says the opposite. CAN YOU HELP ME PLEAAAASE!!!
You have to look at it in terms of capital and current account. A current account deficit (trade deficit) means a surplus in your capital account. A surplus in you capital account means that you are effectively borrowing funds from foreigners (net capital inflows). This inflow of capital helps fund the government deficit.