Question

A country's current national savings and investment identity is expressed in algebraic terms as I – S – (T – G) = (M – X). Assume that the level of domestic investment in a country rises, while the level of private and public saving remains unchanged. In this instance, the rise in domestic: investment will mean:__________

Answer 1

Answer:

Increase in current account deficit.

Explanation:

If a country's total net savings e.g. total of government and private savings are less than the total domestic investment so this deficit must be financed by foreign capital in the form of borrowing. Foreign borrowing results in capital account surplus ultimately increasing trade deficit.

High rate of domestic investment while no change in savings results in or increase in current account deficit. The main reason is that low private or government savings as compared to private investment in domestic capital requires foreign investment.