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
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