The National Income - Essay Example

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The National Income

Thus, net exports denote the difference what a country can produce and what it actually consumes. If the output it produces is insufficient to satisfy consumption, investment, and government expenditures, it will tend to source output from other countries.
On the other hand, the net capital outflow is the difference between domestic savings and domestic investment while the trade balance is shown as the total amount that the country receives for its net exports. Through the national income identity discussed above, it can be seen that net capital outflow is always equal to the country's trade balance. If the trade balance and the net capital outflow is positive, the country is running a trade surplus which means that it is a lender in the international financial market and that its exports is greater than its imports. However, if it is negative, it is running a trade deficit which means that it is a borrower in the financial market and imports is greater than exports.
Following from this, the impact of any policy on the balance of trade can be identified and assessed by considering its effect in the country's savings and investment. Logically, any policy which causes savings and investment to increase supports a trade surplus while one which causes decline in savings and investment will lead to a trade deficit.
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The national income account identity sums up total output in the economy as the total of consumption of domestic goods and services (C), investment in domestic goods and services (I), government expenditures on domestic goods (G) and services and net exports of domestic goods and services (NX or Export - Import)…
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