Question

For an open economy, the ‘twin deficits’ can be expressed by: \[ \text{[where } S = \text{Savings; } I = \text{Gross Private Investment; } G = \text{Government Expenditures; } TR = \text{Transfer Payments; } TX = \text{Taxes; } X = \text{Exports; } M = \text{Imports and NFIA = Net Factor Income from Abroad]} \]

• A. \( S - I = [G - TR - TX] + [X - M] \)
• B. \( I - S = [G + TX - TR] + [M - X] \)
• C. \( S - I = [G + TR - TX] + [X - M] \)
• D. \( I - S = [TX - G + TR] + [NFIA] \)

Hint:

In an open economy, the twin deficits refer to the relationship between the government fiscal deficit and the current account deficit, which can be expressed in terms of savings, investment, and trade balance.

Answer 1

The Correct Option is C

Step 1: Understanding the Concept of ‘Twin Deficits.’
In the context of an open economy, twin deficits refer to the government budget deficit and the current account deficit. These deficits are related to savings and investment as well as the trade balance.
Step 2: Deriving the Formula.
By considering the national income identity for an open economy: \[ S - I = (G - TR - TX) + (X - M), \] where:
- \( S - I \) represents the savings-investment gap,
- \( G - TR - TX \) represents the fiscal balance (government expenditure minus revenue),
- \( X - M \) is the trade balance (exports minus imports).
Therefore, the correct expression for the ‘twin deficits’ is given by option (C).