Saving Investment Approach

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Augmented Saving-Investment Approach

Under the augmented saving-investment approach, equilibrium level of national income is established where sum of all leakages from expenditure on domestic output are equal to the sum of all injections from expenditure on domestic output. Thus, equilibrium level of GDP is established where

S + T + M = I + G + X

By subtracting G and M from both sides, the equations becomes

S + (T – G) = I + (X – M)

In this equation S is private saving and T – G is public saving. On the right hand side, I is the private investment and thus a private asset X - M is the net export surplus which is nation's overseas assets. This equation, therefore, means that condition for GDP equilibrium is that nation's saving must be equal to nation's asset formation o nation's investment.


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