Friday, February 22, 2013

Savings, Production and Net Exports: Part I

S - I = 0; saving is the supply of investment.  Nations with surplus savings tend have low consumption rates and are therefore net exporters; nations with deficient savings tend to have high-consumption rates and are therefore net importers.  Those relationships must make sense if we are to believe there is a balance between supply (saving) and demand (consumption).

China's GDP is primarily built around investment (~50% of GDP) while the US's GDP is primarily built around consumption (~70% of GDP).

China, because of its low consumption rate relative to its production, has surplus savings which it exports.  The US, because of its high consumption rate relative to its production, has deficient savings and relies on imports to meet demand.

In places like the US, low cost imports reduce household budgets, thereby freeing up some extra spending money.  Otherwise, much like a wealth effect, the US struggles against deflation in a balance against Chinese labor unemployment.

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