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International flow of capital, trade and service

Consider an eqn, that whatever income is earned is consumed/ spent

i.e. Total Income = Total spending

If the GDP has to be defined in such cases, whatever is produced is consumed,i.e the consumer has to pay for the purchase

GDP = Total Income = Total spending

E.g. you purchase a car worth 7,00,000, this Rs 7 lac that you have spent would be used by the

company to pay salaries, interest, vendor payment . The balance would be used by the owners or Co

as profit. Now if these people earn income, what do they do of that income?

Total income = Consumption + Savings -------------(1)

[Saving = postponement of Current consumption]

If the pvt. Sector / Company earn income, how do they spend?

Total Spending = Consumption + Investment s -------------(2)

[Investment = investment in physical assets]

From eqn 1 and 2

Ni = C + S -----------------------------------(1)

Ns = C + I ---------------------------------- -(2)

NiNs = SI ------------------------------(3)

Condition [1]

If Ni > Ns = S > I ---------------------------(4)

i.e. S > I = excess funds available in the nation

i.e. S > I = excess capital / surplus capital

Note you cannot invest this excess capital in domestic market, because you have already exhausted

the investment limit. It means no further domestic investment is possible. The surplus capital has to

go out of India

i.e. Surplus Saving = [domestic saving] + [net foreign investment] ------(5)

[net foreign investment] = [public + pvt capital] + [Net capital transfer] ---------------------(6)

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Consider GDP and denoted by Y

Y = Consumption + Investment +Govt. spending

Plz NoteExport not considered as of now.

i.e Y = C + I + Gs

i.e. YCGs = I

i.e. saving = investment

Since we have a govt, the govt will levy tax. i.e. Pvt sector would be taxed and the tax proceeds

would be used by he govt for national spending

(YCT )+ (T-Gs) = I ---------------------(7)

If T = G, it means T-G = 0, all invest is done by Pvt sector

If T > G, Govt has a Surplus budget, If T < G, Govt has a Deficit budget

Consider if T > G, Govt has a Surplus budget,

(YCT )+ (T > Gs) = I ---------------------(8)

Public and pvt capital outflow = financial a/c deficit

Consider if T < G, Govt has a Deficit budget,

(YCT )+ (T < Gs) = I ---------------------(9)

Public and pvt capital inflow = financial a/c Surplus

Conclusion for inflow /outflow of funds

National saving (deficit) = Surplus in financial a/c

National saving (Surplus) = Deficit in financial a/c

Let us consider goods/services

N products = Total goods / services produced

Out of the total goods produced, some would be consumed in India or domestic level

i.e. National product - Domestic consumption = Balance available for export

But if Domestic consumption National product = Balance available for import

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NpDc = ExportImport

NiNe = ExportImport

Saving

Investment = Export

Imports

If Saving > Investment = Export and CA surpluse.g. japan

If Saving < Investment = Import and CA deficite.g. US

Equilibrium and Disequilibrium, Consider eqn (8)

(YCT)+ (T - Gs) = I

Pvt saving + Public savings = total Savings

i.e Total Saving = Investment

I.e. if saving are generated / money is available as funds for borrowers i.e. loanable funds

Loanable RoI = Real Interest rates

Real interest rate = Nominal interest + Inflation

Consider for given level of demand for funds, we get certain supply of funds. At point A, supply

curve intersects the demand curve. In case if there is economic expansion the demand for funds shifts,

as a result

Increase of demand leads to more profit Supplier of funds expect higher return

The 2nd

reason for shift in demand curve is due to govt intervention

If govt. is running a deficit budget i.e. (T