$Y -(C+I+G) = X - M$

In a closed economy, $(X-M) = 0$


Y --> Income/Output

C,I,G --> Consumption, Investment and Government expenditure respectively.

X --> Exports

M --> Imports

I want an economic intuition how is it possible that aggregate of all savings in a closed economy equals 0.

  • 1
    $\begingroup$ Your identity actually shows that aggregate savings is equal to investment. Unless investment is zero, there is no reason for you to have zero savings, as per your identity. $\endgroup$ – erik Sep 26 '18 at 18:26
  • $\begingroup$ Please elaborate and give a conceptual understanding. So what happens in an open economy Savings does not equal Investment. $\endgroup$ – DrStrangeLove Sep 27 '18 at 2:30
  • $\begingroup$ I think @BB King’s answer below answers everything you asked. $\endgroup$ – erik Sep 29 '18 at 1:44

In a closed economy, savings equal investment. Your equation actually shows this. We have:

$Y−(C+G) - I = 0$.

Note that savings, by definition, is just equal to the production $Y$ that is not consumed. Here we have consumption by private citizens $C$ and consumption by the Government $G$. Therefore, savings $S$ is:

$S = Y - (C+G)$

and therefore:


So national savings can only be zero if investment is zero.

Here is a concrete example. You don't spend all your income and save money in a bank. People who want to invest (e.g. to start a business or buy a tractor) go and borrow that money, which is then invested.

In an open economy, there is no reason for savings to equal investment. Nevertheless, the two are often strongly correlated in reality, which is known as the Feldstein-Horioka Puzzle. This is/was one of the major puzzles in international economics and a large literature has been devoted to explaing it.


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