In a Closed Economy, the Fact That Total Income Equals

Essay

In a closed economy, the fact that total income equals total expenditure is reflected by the GDP identity Y = C + I + G.
a. Starting from the GDP identity, show that national saving (S) must be equal to investment. Show that an increase in government spending reduces national saving.
b. Rewrite the GDP identity by introducing taxes (T). In this new form of the GDP relationship, identify private saving and public saving. Show that an increase in taxes has no effect on national saving.
c. Is the equation S = I true for an open economy? Could you explain why or why not?