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$$NX ≡ (S-I) + (T-G)$$ Read this as “the trade balance (net exports) is identical to the sum of net savings (savings minus investment) and the government’s budget surplus or deficit (taxes minus spending).” This is not a theory of what causes what; it’s an identity, different ways of expressing the same “what”.

Let's say the U.S. had a $NX$ or trade deficit of $500$ billion dollars and overnight the U.S. forced countries around the world to buy $1$ trillion dollars of U.S. military equipment giving the U.S. a trade surplus of $500$ billion. Does this mean that the equation: $NX ≡ (S-I) + (T-G)$ doesn't take into account non-macroeconomics factors and therefore is wrong?

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If foreign countries suddenly bought $\$1$ trillion worth of stuff, presumably the US would supply this out of existing inventories (i.e. stocks of goods).

Before anything else happens, this represents a reduction of investment in the US and your equation would continue to balance since the increase in $NX$ would be offset by a reduction in $I$ (which has a negative sign in your national accounts identity).

What would happen next is probably that the manufacturers would make more stuff to bring inventories back towards previous levels, increasing investment. They and their workers may pay taxes on their income. They may import some more stuff. What is left may add to savings. But throughout this process the national accounts identity will remain true.

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  • $\begingroup$ So reducing inventories is considered to be a reduction of investment and not just assets? $\endgroup$ – blackbird Jun 16 at 22:31
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    $\begingroup$ Increasing inventories is regarded as increasing real assets and so positive investment. Similarly decreasing inventories is regarded as decreasing real assets and so negtive investment. But this is little more than bookkeeping and there are also consequences on the financial account: sell something and you increase financial assets to offset the decrease in real assets. That is why the current account of the balance of payments is balanced by changes in the capital and financial accounts. $\endgroup$ – Henry Jun 16 at 22:38
  • $\begingroup$ Ah, ok, now, it makes sense. $\endgroup$ – blackbird Jun 16 at 22:39
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That equation is an accounting identity, it is valid and true for any society and in any time. What you don't seem to understand is that it relates flows, not stocks. That is, it only informs you that if look at these aggregates over the same time period (a day, month, quarter, semester, year, etc) then trade balance equals private domestic savings and the public sector's primary result.

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