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Q: equilibrium ( Answered 5 out of 5 stars,   0 Comments )
Subject: equilibrium
Category: Business and Money > Economics
Asked by: mike5-ga
List Price: $3.00
Posted: 05 Dec 2002 08:11 PST
Expires: 04 Jan 2003 08:11 PST
Question ID: 119734
In a closed, mixed economy, equilibrium is reached when saving(S)
equals investment spending(I), but this is not the case in an open,
mixed economy.

Is this statement right? why?
Subject: Re: equilibrium
Answered By: lot-ga on 05 Dec 2002 10:39 PST
Rated:5 out of 5 stars
Hello mike5-ga,

As background, in a closed economy Y (income) = E (expenditure) which
is a basic Keynesian rule of economics, from this,
S (savings) is a 'leakage' (expenditure that is withheld from the
I (investment) is an 'injection' (extra expenditure funded from

Y = E + S    or    S =Y - C
Y = E + I    or    I = Y - C

..therefore in a closed economy S (savings) = I (investment), and
investment can never be greater than savings, infact investment always
equals savings.

The statement is correct as the normal balance (equilibrium) of a
closed economy is disturbed by external variables such as 'foreign'
investment such as cash injections into the once 'closed' economy.
Similarly savings may not stay within the economy and migrate to
another. Clearly with this interchange of savings and investments
between one economy and another, certain economies will accrue either
more savings and investments than another. This creates an imbalance
and the equilibrium of a closed economy is breeched causing

Additionally if goods are imported from one economy to another this
will affect the level of investment, as firms pull back production as
some of the domestic demand is satisfied by foreign goods. Similarly
savings will be affected as some expenditure will be on imported
goods, and there will be an outflow of money.

Search Strategy:
Chapter 17 "National Income Determination" page 203 
"Key Facts Passbook - Economics" by Roger Maile BA  
Published 1980 by Intercontinental Book Productions  

I hope that helps, if you need clarification of the answer just ask.

Kind regards

Clarification of Answer by lot-ga on 05 Dec 2002 12:08 PST
Opps, typo 
the above should be

Y = E + S    or    S = Y - E
Y = E + I    or    I = Y - E

mike5-ga rated this answer:5 out of 5 stars

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