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International Futures Help System

Domestic Closure Between Savings and Investment

The SAM structure in IFs is really a combination of an accounting system and an equilibrating system. Just as the equilibrating mechanisms discussed above are important, it is critical to make sure that the accounting balances are maintained. One good measure of ultimate balance is the required, conceptual equality of total savings and investment. Their equality, in fact, is also reassurance that the goods and service market elements of the model are fully integrated with the broader financial ones.

Savings constitutes the residual term that assures balance between row and column totals for each agent/institution (just as investment has a residual component with respect to the goods and services market when delta stocks are added to gross capital formation). They are computed in all years, both to balance the SAM and also to provide adjustments to two stock terms, government debt and external debt, that serve as touchstones for equilibrating mechanisms in the dynamics of the model.

The documentation in this chapter explained the computations of household savings and firm savings. Chapter 4 documented government savings. The only element missing for the calculation of total savings is foreign savings.

Foreign savings come in two flavors. The first and basic flavor assumes, like all of the other savings terms, that there are no relative price changes in the economy. It maintains all of the physical balances in the economy of a specific country/region.

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The total savings in each country will be the sum of the individual terms. By definition it will equal investment (I), defined as capital formation (IGCF) plus inventory stock (ST) changes. Treatment of physical balances over time, not elaborated here, assure that equality. Looking at the two variables side by side is a good test of the functioning of the SAM. Having total investment, it is also possible to compute investment by origin sector (INVS), which is needed in the goods and services market module.

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The second flavor of foreign savings recognizes that in IFs there are relative price changes based primarily on the computation of prices in the two partial equilibrium submodels (food and energy). This second variant takes those into account in computing a relative-price adjusted foreign savings (ForSavRPA) that is then used in computations of international debt and exchange rates. It is time to move to the international side of the SAM.

In economic trade the computation of two alternative measures of exports (X) and imports (M) was discussed. The alternative multiplies the sectoral exports (XS) and imports (MS) of each country by world prices (WP) before summing in order to compute relative-price adjusted exports (XRPA) and imports (MRPA) for each country. Why is this important? If, for example, a country were highly dependent on energy exports and the price of energy (from the energy submodel) doubled relative to other prices, failure to adjust trade for prices would underestimate the country’s trade balance.

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Given relative-price adjusted trade, it is also possible to compute relative-price adjusted foreign savings (FORSAVRPA) and total savings (SAVINGSRPA).

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These relative-price adjusted savings variables are used for information only and do not affect financial balances or other variables. The relative-price adjusted trade, however, is taken to the trade balance (TRADEBAL) in the economic model and on to the current account balance (CURACT) in the international financial accounting and equilibration. There it will affect international debt calculations (XDEBTRPA).