![]() ![]() The identity only says that something will adjust-it does not specify what. ![]() In all of these situations, there is no reason to expect in the real world that the original change will affect only, or primarily, the trade deficit. The ceteris paribus-or “other things being equal”-assumption is important here. If the rate of domestic investment surges, then, ceteris paribus, the trade deficit must also rise, to provide the extra capital. ![]() In effect, the government is no longer providing savings and so, if nothing else is to change, more investment funds must arrive from abroad. If the government starts borrowing instead of saving, then the trade deficit must rise. In effect, the economy would be relying more on domestic capital and less on foreign capital. If domestic savings increases and nothing else changes, then the trade deficit will fall. Supply of capital = Demand for capital S + (M – X) + (T – G) = I Savings + (trade deficit) + (government budget surplus) = Investment Supply of capital = Demand for capital S + (M – X) + (T – G) = I Savings + (trade deficit) + (government budget surplus) = Investment ![]()
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