In chapter 8 of The Principles of Macroeconomics we were given a very simple economy This economy revolved around firms and households and the total flow of money was called aggregate income The equation that we had to work with was as follows Y C S Y represents aggregate income and C and S are consumption and savings respectively During chapter 9 we were introduced to the government and its hand in the economic cycle With the government came the concept of disposable income and taxes Our new aggregate income equation is as follows Y C S T T in this case represents taxes and are deducted from our aggregate income to give us Y d or disposable income Rearranging this equation we can see create a picture of what our national savings looks like S Y C T This definition of savings is again very basic but holds true The national income that businesses and households in other words only households receive can be used in three ways As consumption taxes and savings Once the first two are subtracted all that is left is our savings On the other side of equilibrium is our aggregate expenditure The equation is as follows AE C I G I represents the planned investments made by businesses money that is used by households savings deposited in banks and G here represents government expenditures We were taught that in equilibrium our aggregate expenditures must equal our aggregate income C S T C I G simplified S T I G The right equation represents leakages and injections where S T are leakages and I G are injections One should not that in this case T doesn t have to equal G or S equal I rather the summation of both sides must equal each other This equation can be rearranged once more to isolate budget deficit G T S I This equation shows us some things about the roles of consumers businesses and the government in maintaining a healthy saving deficit Primarily that equilibrium will only be maintained government taxation does not exceed planned investments or businesses borrowing from financial institutions Also we can see that in order for this equilibrium to be maintained government expenditures must be made if there are savings be leaked out of the cycle Savings are essential to this system and if households are living beyond their means then they cannot save in fact they might even owe money Self imposed policies that limit the lending capabilities of financial institutions would offset the large amount of credit being circulated and allow for a balance to be re established At the same time tax reform that allows households to create savings and not have to use all of their disposable income as consumption could help In order to offset the leakages of savings larger planned investments can be made to inject money into the economy in the form of factories buildings infrastructure etc A larger value of I will lead to a negative value for G T which is an indication of a budget surplus As the value of I increases so does household income as an economy grows and eventually tax revenue will increase Resources Case Fair and Oster Principles of Macroeconomics 10th ed N p Pearson 2012 Print http www concordcoalition org iousa americas four deficits