Saving and Investment in Open Economy, Macro Economics Video Lecture | Macro Economics - B Com

with everything we've learned now about
the balance of payments and
international capital flows we can go
back and update our saving and
investment model previously we assumed
that we were in a closed economy and we
just ignored net exports but now we're
going to have a look at what the case is
in an open economy so in a closed
economy we said that savings were equal
to investments we showed that that was
the case pretty easily now we're gonna
update that and say that in an open
economy we've actually got savings plus
net capital flows is equal to investment
so this also is not too hard to show
intuitively you just have to realize
that it is no longer the case
that national savings are the only
source of investment we now have capital
inflows as a source of investment and at
the same time savings do not have to go
into domestic investment they can go
into capital outflows so there's a
couple of ways you can look at this
equation depending on the sign of net
capital flows if it's positive then
we've got investment larger than savings
and the way you could sort of look at
that is that investment is coming from
two sources you've got national savings
as a source of funds for investment and
then you've also got your foreign
investment your net foreign investment
you