Worth: Mankiw Economics 5e 117 output, this equation subtracts spending on imports. Defining net exports to Y=C+I+G+NX This equation states that expenditure on domestic output is the sum of con- sumption, investment, government purchases, and net exports. This is the most common form of the national income accounts identity; it should be familiar from Chapter 2. The national income accounts identity shows how domestic output, domestic ending, and net exports are related. In particular, NX= Y -C+I+ G) Net Exports =Output- Domestic Spending. his equation shows that in an open economy, domestic spending need not equal the output of goods and services. If output exceeds domestic spending, we export the difference: net exports are positive. If output falls short of domestic spending, we import the difference: net exports are negative. International Capital Flows and the Trade balance In an open economy, as in the closed economy we discussed in Chapter 3, finan- cial markets and goods markets are closely related. To see the relationship, we must rewrite the national income accounts identity in terms of saving and invest- ment. Begin with the ide entity Y=C+I+G+NX Subtract c and g from both sides to obtain Y-C-G=I+NX Recall from Chapter 3 that Y-C-G is national saving S, the sum of private saving, Y-T-C, and public saving, T-G.Therefore, S=I+NX Subtracting I from both sides of the equation, we can write the national income accounts identity as S-IENX This form of the national income accounts identity shows that an economy's net exports must always equal the difference between its saving and its investment Let's look more closely at each part of this identity. The easy part is the right hand side, NX, which is our net export of goods and services. Another name for let exports is the trade balance, because it tells us how our trade in goods and services departs from the benchmark of equal imports and exports User JOENA: Job EFF01460: 6264_ch05: Pg 117: 19205#/eps at 100sgm wed,Feb13,20029:264MUser JOEWA:Job EFF01460:6264_ch05:Pg 117:19205#/eps at 100% *19205* Wed, Feb 13, 2002 9:26 AM output, this equation subtracts spending on imports. Defining net exports to be exports minus imports (NX = EX − IM ), the identity becomes Y = C + I + G + NX. This equation states that expenditure on domestic output is the sum of con￾sumption, investment, government purchases, and net exports.This is the most common form of the national income accounts identity; it should be familiar from Chapter 2. The national income accounts identity shows how domestic output, domestic spending, and net exports are related. In particular, NX = Y − (C + I + G) Net Exports = Output − Domestic Spending. This equation shows that in an open economy, domestic spending need not equal the output of goods and services.If output exceeds domestic spending, we export the difference: net exports are positive. If output falls short of domestic spending, we import the difference: net exports are negative. International Capital Flows and the Trade Balance In an open economy, as in the closed economy we discussed in Chapter 3, finan￾cial markets and goods markets are closely related. To see the relationship, we must rewrite the national income accounts identity in terms of saving and invest￾ment. Begin with the identity Y = C + I + G + NX. Subtract C and G from both sides to obtain Y − C − G = I + NX. Recall from Chapter 3 that Y − C − G is national saving S, the sum of private saving, Y − T − C, and public saving, T − G.Therefore, S = I + NX. Subtracting I from both sides of the equation, we can write the national income accounts identity as S − I = NX. This form of the national income accounts identity shows that an economy’s net exports must always equal the difference between its saving and its investment. Let’s look more closely at each part of this identity.The easy part is the right￾hand side, NX, which is our net export of goods and services.Another name for net exports is the trade balance, because it tells us how our trade in goods and services departs from the benchmark of equal imports and exports. CHAPTER 5 The Open Economy | 117