Macro: Savings and trade balance

CFA Level I Economics
#1

So glad this forum exists. Most things I can figure out with enough time but I’m stumped on this one. I can’t see (intuitively) why savings are linked to the trade balance

In book 2, page 227

S = I + (G-T) + (X-M)

So private savings goes to:

  1. loan to businesses for I

  2. loan to government for G not covered by T

Now the part I don’t understand:

  1. if X-M < 0 => X>M => Some part of S is being used for the amount X exceeds M.

If exports are greater than imports, how does this use up private savings?

I can’t decode the book: “If X-M > 0 then domestic private saving is being supplements by inflows of foreign savings and overseas economies are building up financial claims against the domestic economy.”

Any hints?

#2

“If exports are greater than imports, how does this use up private savings?”

S = … + (X-M) would suggest that if If exports are greater than imports, private savings INCREASE.

I have no idea what “overseas economies are building up financial claims against the domestic economy” means. I’d think the opposite - if you hold foreign currency thanks to all the exports, you hold financial claims against the foreign economy. Ask China if they have a financial claim againt US or vice versa.

#3

I didn’t come to the Economics section yet but as I remember from my universtity lectures changes in the trade balance (X-I) alre always reflected in the capital balace. If the Exportes are greates than the Imports the differents ends up as net capital in the domestic economy. This capital then could be uses for investments or savings.

So, this would lead to the equation S+I = X-M.

Best,

Oscar

#4

further on page 233 (book 2):

G = (S-I) + T + (M-X)

So the increase in government spending must be balanced by some combination of 1) an increase in saving relative to investment, 2) an increase in taxes, and 3) a rise in imports relative to exports.

I understand:

  1. savings that are not invested in business (I) can fund gov. spending (through gov. bonds)

  2. taxes fund gov. spending

I do not understand:

  1. imports greater than exports fund gov. spending, or conversely a trade surplus reduces funds for gov. spending.

If a country does not export anything, and imports one apple for $1, how does this allow the government to spend $1 more?

And is this normative or a positive statement. I mean, are they saying this will naturally happen, or the government ought to do this to acheive some equilibrium…? It’s all so vauge to me right now.

Thanks for the replies guys.

Thanks, thinking this way helps.

This is the point I’m struggling with.

This makes intuitive sense but doesn’t solve my problem completely