Answer :

In a closed economy the savings and investments are equal at equilibrium level of income whereas in an open economy the savings and investments differ.

Y = C + I + G + X – M


NX = NX = X - M


Or,Y = C + I + G + NX


Or,Y - C - G = I + NX .....(1)


Y - C - G can be regarded as national savings (S) or the net national income after all consumption and government spending.


So, we can write -


Y - C - G = S


Or, S = I + NX


S = Private Savings (Sp) + Government Savings (Sg)


Therefore,


S = Sp + Sg


Or, Sp + Sg = I + NX


Or, NX = Sp + Sg - I


Sp = Y - C - T


Sg = T - G


So, NX = Y - C - T + T - G - I


Or, NX = Y - C - G – I


Or, G = Y - C - I – NX


Subtracting T from both sides


Or, G - T = Y - C - I - NX - T


Or, G - T = Y - C - T - I – NX


Or, G - T = (Sp- I) – NX


Where, NX = X - M


G - T = (SP- I) - (X - M)


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