{"id":15502,"title":"GED Explains: Global Imbalances and the Role of Savings","link":"https:\/\/bst-europe.eu\/de\/globalization\/ged-explains-global-imbalances-and-the-role-of-savings\/","date":"24. Juli 2017","date_unix":1500881799,"date_modified_unix":1644496112,"date_iso":"2017-07-24T07:36:39+00:00","content":"
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Shutterstock \/ In Tune<\/figcaption><\/figure>\n

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Trade deficits as well as current account surpluses are one reason for growing protectionism. A lack of international competitiveness, due to low productivity and high labor costs per unit, is seen as the major reason for trade deficits. As a matter of fact, however, domestic consumption behavior is an important cause of global imbalances, too.<\/em><\/p>\n

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Savings and lack of demand<\/strong><\/p>\n

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In a very simple model of macroeconomic relationships; the goods and services produced within one country during one year \u2013 the gross domestic product (GDP) \u2013 can be either used for domestic consumption of private households and the government (Cdomestic<\/sup>) or for investments of the companies (I). In a closed economy \u2013 an economy with no international trade activities or other economic cross-border activities \u2013 the entire income of the economy can be used for domestic consumption (Cdomestic<\/sup>) or for savings (S).<\/p>\n

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Looking at the domestic market for goods and services, savings can be problematic: If the economy as a whole does not spend the entire income on the goods and services produced within the country, the economy has a lack of demand. If, for example, ten percent of the national income is used to build savings, ten percent of the produced goods and services can not be sold by the domestic companies. If companies are not able to sell their entire output, it is quite reasonable that they lower their production. Reducing the level of output implies a lower level of employment. Hence, savings have a negative impact on production and employment.<\/p>\n

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The lack of demand caused by savings can be compensated by domestic investment. If companies buy the products which private households do not want, aggregate demand for goods and services equals aggregate supply. Hence we have a market clearance and there is no need for companies to reduce their output and employment.<\/p>\n

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Saving, investment and excess supply<\/strong><\/p>\n

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In case of national savings in a closed economy, the macroeconomic demand for goods and services equals macroeconomic supply only if national investment equals national savings (I = S). If national savings are larger than the entire investment of all companies (S > I), the economy suffers from a lack of demand or an excess supply of goods and services. The only way to prevent a reduction of output and employment is finding additional buyers. In other words, the country has to sell the excess supply to foreign countries.<\/p>\n

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Working with the abbreviations already used at the beginning of the text, the following relationship can be formulated: GDP = Cdomestic<\/sup> + I. In case of an open economy with cross-border trade activities, supply of goods and services is enlarged by the imported goods and services (import = IM). Simultaneous, the exports (EX) of the country constitute an additional element of demand for domestic goods and services. Hence we can reformulate the relationship \u201cGDP = Cdomestic<\/sup> + I\u201d as follows:<\/p>\n

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(1)<\/span> GDP + IM = Cdomestic<\/sup> + I + EX\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 or<\/p>\n

(2)<\/span> GDP \u2013 Cdomestic<\/sup> = I + EX \u2013 IM<\/p>\n

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If we take into account that savings are that part of GDP which is not consumed (S = GDP \u2013 Cdomestic<\/sup>), equation (2) can be reformulated:<\/p>\n

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(3)<\/span> S = I + EX \u2013 IM\u00a0\u00a0\u00a0 \u00a0\u00a0 or<\/p>\n

(4)<\/span> S \u2013 I = EX \u2013 IM<\/p>\n

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Equation (4) illustrates the macroeconomic relationship between savings, investment and the trade balance:<\/p>\n

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