Q.Define budget deficit and trade deficit. The excess of private investment over saving of a country in a particular year was Rs 2,000 crores. The amount of budget deficit was (–) Rs 1,500 crores. What was the volume of trade deficit of that country?

National Income Identity: Budget Deficit and Trade Deficit

Budget deficit is the excess of total government expenditure (including transfer payments) over total government revenue (taxes and non-tax receipts). In the national income accounting framework, it is written as $G - T$, where $G$ is government final consumption expenditure and $T$ is net tax revenue.

Trade deficit is the excess of imports over exports of goods and services, i.e., $M - X$, where $M$ is imports and $X$ is exports.

The fundamental national income identity for an open economy is:

Rearranging, we get the saving-investment identity:

Here:

• $S - I$ = excess of saving over investment (negative if investment exceeds saving)
• $T - G$ = government budget surplus (negative if there is a deficit)
• $X - M$ = net exports (negative if trade deficit)

Given:

• Excess of private investment over saving = $I - S = \text{Rs } 2,000 \text{ crores}$, so $S - I = -\text{Rs } 2,000 \text{ crores}$. …

Let’s begin with the core idea. In macroeconomics, the national income identity for an open economy tells us that total output (GDP) equals total spending:

$Y = C + I + G + (X - M)$.

From this, we can rearrange to show the relationship between saving, investment, government budget, and the trade balance. The key is to understand that any excess of investment over domestic saving must be financed either by government borrowing (budget deficit) or by borrowing from abroad (trade deficit).

Start by writing the identity in terms of saving. National saving $S$ is the part of income not consumed or spent by the government: $S = Y - C - G$. Substitute this into the GDP identity:

$Y - C - G = I + (X - M)$

So $S = I + (X - M)$.

Now bring investment to the left:

$S - I = X - M$.

This tells us that the excess of saving over investment equals the trade surplus (exports minus imports). If investment exceeds saving, the right side must be negative — a trade deficit.

But we also need to account for the government budget. Private saving $S_p$ and government saving $S_g$ together make national saving: $S = S_p + S_g$. Government saving is simply tax revenue minus government spending: $S_g = T - G$. A budget deficit means $G > T$, so $S_g$ is negative.

Rewrite $S - I$ as $(S_p + S_g) - I = (S_p - I) + (T - G)$.

And we already have $S - I = X - M$. So:

$(S_p - I) + (T - G) = X - M$.

This is the fundamental link. Rearranging:

$X - M = (S_p - I) + (T - G)$.

Here, $(S_p - I)$ is the excess of private saving over investment — but the question gives the excess of private investment over saving, which is the negative of that. So if private investment exceeds saving by Rs 2,000 crores, then $S_p - I = -2000$ crores. …