In macroeconomics, Investment spending is the expenditure on capital equipment used to conduct economic activity. In addition, it will also be shown how S = I.
To calculate investment spending in macroeconomics we need to know a few formulas. In the macroeconomy we have our Gross Domestic Product (GDP) formula which states that total output/GDP (Y) is equal to consumption (C) , investment (I), government spending (G) and net exports (NX):
Y = C + I + G + NX |
Where exports (X) minus imports (M) are the net exports component:
NX = X - M |
If the economy is a closed economy this means that there is no trade with outside countries which occurs, which means we can write our GDP formula as:
Y = C + I + G |
Sometimes we can make this assumption if the quantity of exports is very similar to the level of imports. If we assume that our economy is a closed economy than we can find out calculate our investment spending by re-arranging our GDP equation such that:
I = Y - C - G |
Which is actually exactly the same as our national savings formula. Thus, we have actually shown that S = I in a closed economy.
Example |
Suppose that GDP is 10,000, Tax is 1,500, Government spending is 4,000 and consumption is 4,000. Using the equation from above, we can see that:
I = Y - C - G I = 10,000 - 4,000 - 4,000 I = 2,000 |
Which again is the same as the national savings found in the post here.