In open economies,
A. as in a closed economy, saving and investment are not necessarily equal.
B. investment always refers to the domestic stock market.
C. saving and investment are not necessarily equal as they are in a closed economy.
D. saving and investment are necessarily equal.
E. saving and investment are necessarily equal contrary to the case of a closed economy.
The correct answer and explanation is:
The correct answer is C. saving and investment are not necessarily equal as they are in a closed economy.
In an open economy, the relationship between saving and investment is different from that in a closed economy. In a closed economy, saving must equal investment because there are no interactions with the outside world. This balance holds because any saving in the economy is directly used for investment within the same economy. However, in an open economy, saving and investment do not have to be equal because the economy is open to international trade and capital flows.
In an open economy, investment can exceed saving if the country borrows from other countries to finance its investment. Conversely, if the country is saving more than it is investing, the excess savings can be lent to other countries through capital outflows. This creates a situation where saving and investment are not necessarily equal. The difference between saving and investment is reflected in the trade balance. If a country is running a trade deficit, it is borrowing from the rest of the world to finance its domestic investment. On the other hand, a trade surplus implies that the country is lending to the rest of the world, with saving exceeding investment.
Therefore, while the identity between saving and investment holds in a closed economy, it is not the case in an open economy. External borrowing or lending adjusts the balance between saving and investment, making them not necessarily equal. This relationship highlights how an open economy can interact with global financial markets and trade systems.