National saving

In economics, a country's national saving is the sum of private and public saving. It equals a nation's income minus consumption and the government spending.

Economic model

Closed economy with public deficit or surplus possible

In this simple economic model with a closed economy there are three uses for GDP (the goods and services it produces in a year). If Y is national income (GDP), then the three uses of C consumption, I investment, and G government purchases can be expressed as:

Y

=

C

+

I

+

G

{\displaystyle Y=C+I+G}

National saving can be thought of as the amount of remaining income that is not consumed, or spent by government. In a simple model of a closed economy, anything that is not spent is assumed to be invested:

National Saving

=

Y

−

C

−

G

{\displaystyle {\text{National Saving}}=Y-C-G}

National saving can be split into private saving and public saving. Denoting T for taxes paid by consumers that go directly to the government and TR for transfers paid by the government to the consumers as shown here:

(

Y

−

T

+

T

R

−

C

)

+

(

T

−

G

−

T

R

)

=

I

{\displaystyle (Y-T+TR-C)+(T-G-TR)=I}

(Y − T + TR) is disposable income whereas (Y − T + TR − C) is private saving. Public saving, also known as the budget surplus, is the term (T − G − TR), which is government revenue through taxes, minus government expenditures on goods and services, minus transfers. Thus we have that private plus public saving equals investment.

The interest rate plays the important role of creating an equilibrium between saving S and investment in neoclassical economics.

S

(

r

)

=

I

(

r

)

{\displaystyle S(r)=I(r)}

where the interest rate r affects saving positively and affects physical investment negatively.