For an open economy, the equation Y = C + I + G + NX is an identity. If we define national saving, S, as the total income in the economy that is left after paying for consumption and government purchases, then for an open economy, it is true that
A)S = I.
B)S = 0.
C)I = S + NX.
D)S = I + NX.

Question

Quizplus · Accepted Answer

National saving (S) in an open economy is defined as the total income (Y) minus consumption (C) and government purchases (G), which gives us S = Y - C - G. The equation for an open economy is Y = C + I + G + NX. Rearranging this equation to solve for I gives us I = Y - C - G - NX, which is equivalent to I = S - NX. Therefore, rearranging for S gives us S = I + NX, which matches option D.

For an Open Economy, the Equation Y = C