Explain how savings equals investment in a closed capitalist economy?

Explain how savings equals investment in a closed capitalist economy?

What will be an ideal response?

ANSWER

The national income identity is given by Y = C + I + G + NX, where, C is the consumption expenditure, I is the investment expenditure, G is the Government Spending, and NX is the net exports. In a closed capitalist economy, Y = C + I. In other words, GDP is the sum of aggregate consumption expenditure and investment. It is also true, that in a closed economy without government spending, all the income generated will be either consumed or saved. Hence, Y = C + S. Since Y = C + S = C + I → S = I.