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What's the point of (Sp-I)+(T-G)=X-M?

Diqiucun_Cunmin
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5/3/2015 11:01:35 PM
Posted: 1 year ago
I was actually wondering about this. Most of the stuff we learn in econ are useful, as they provide explanations to what happens in the world, or are useful in making policy decisions. One exception, though, is the equations Sn-I = X-M and (Sp-I)+(T-G)=X-M. Do they have any real-life applications other than testing students on it?
The thing is, I hate relativism. I hate relativism more than I hate everything else, excepting, maybe, fibreglass powerboats... What it overlooks, to put it briefly and crudely, is the fixed structure of human nature. - Jerry Fodor

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darkkermit
Posts: 11,204
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5/5/2015 7:54:19 PM
Posted: 1 year ago
"Is a macroeconomic proposition that there is a strong link between a national economy's current account balance and its government budget balance"

http://en.wikipedia.org...

Can't that equation just easily be derived anyways from the GDP equation
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ResponsiblyIrresponsible
Posts: 12,398
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5/8/2015 2:02:59 PM
Posted: 1 year ago
At 5/3/2015 11:01:35 PM, Diqiucun_Cunmin wrote:
I was actually wondering about this. Most of the stuff we learn in econ are useful, as they provide explanations to what happens in the world, or are useful in making policy decisions. One exception, though, is the equations Sn-I = X-M and (Sp-I)+(T-G)=X-M. Do they have any real-life applications other than testing students on it?

It's expressed in a way I'm not accustomed to, but I think the equation stems from:

Y = C + G + I + [X - M]
Y - C - G - I = [X - M]

Identity: Y - C - G = S, where S is total national savings

S - I = X - M = NX

Or, if we rearrange this, we get:

S = NX + I

It's called the user-savings identity; it basically says that savings can either go to investment or to acquiring foreign assets. If savings exceeds investment, then NX is positive; if investment exceeds savings, then NX is negative.

It's a recognition of the mechanism of capital accumulation - since, obviously, savings tends to go into investment, and thus drive long-run growth.

For instance, the Solow-Growth model defines capital accumulation as:

change in k = [s * A * k ^ 0.3] - [(n + delta) * k] = y

where k = capital per worker
s = savings rate per worker
A = total factor productivity
n = population growth
delta = depreciation
y = per capita output

So, in other words, savings rotates the investment function upward, and thus boosts capital accumulation, and thus longer-run growth. If savings were too low, that would tend not to bode well for the economy over the longer run.
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Diqiucun_Cunmin
Posts: 2,710
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5/13/2015 5:30:48 AM
Posted: 1 year ago
Sorry, I thought I'd replied to this the day I saw JMK on Hangouts... Apparently I haven't, and thanks to both of you for the info. I now know that the equation has value after all, particularly concerning capital accumulation, which seems important for a market economy. :)
The thing is, I hate relativism. I hate relativism more than I hate everything else, excepting, maybe, fibreglass powerboats... What it overlooks, to put it briefly and crudely, is the fixed structure of human nature. - Jerry Fodor

Don't be a stat cynic:
http://www.debate.org...

Response to conservative views on deforestation:
http://www.debate.org...

Topics I'd like to debate (not debating ATM): http://tinyurl.com...