Answer to Question #289853 in Macroeconomics for Daisy

Question

Government saving is defined as T- (G+TR+INT).

Here, G includes both govt. consumption and govt. investment. But ideally, we should not include investments while calculating savings.

But even if we do not separate the two components out of G, we get the same answer, i.e., both the definitions of uses-of-savings identity hold true. (The difference arises only because of some statistical discrepancies)

It would indicate that govt. investments are nil. Why does this happen?

Answer 1

The equality of savings and investments is fulfilled for the economy as a whole, but not necessarily for each of the sectors (private, public, external world). For example, investments can also grow with a reduction in private and public savings due to an increase in capital inflows from abroad.

Savings can be used both to invest in real assets and to increase financial assets. Let's assume for simplicity that there are two types of financial assets: government bonds and cash. Bonds and cash are liabilities (liabilities) of the state and assets of the private sector. Then the state savings can be used either to cover the public debt, or to reduce the money supply.