TM 19-1 Copyright © 1998 Addison Wesley Longman, Inc. The Twin Deficits Net Exports Net exports is exports of goods and services minus imports of goods and services.

TM 19-2 Copyright © 1998 Addison Wesley Longman, Inc. The Twin Deficits A government sector surplus or deficit is net taxes minus government purchases of goods and services.

TM 19-3 Copyright © 1998 Addison Wesley Longman, Inc. The Twin Deficits A private sector surplus or deficit is saving minus investment.

TM 19-4 Copyright © 1998 Addison Wesley Longman, Inc. The Twin Deficits Variables ExportsX855 ImportsM954 Government purchasesG1,407 Net TaxesT1,340 InvestmentI1,116 SavingS1,084 Symbols and equations United States in 1996 (billions of dollars)

TM 19-5 Copyright © 1998 Addison Wesley Longman, Inc. The Twin Deficits Net Exports X - M, 855 – 954 = -99 Government sector, T - G, 1,340 – 1,407 = –67 Private sector, S - I, 1,084 – 1,116 = –32 Surpluses and deficits

TM 19-6 Copyright © 1998 Addison Wesley Longman, Inc. The Twin Deficits National accountsY = C + I + G + X – M = C + S + T RearrangingX – M = S – I + T – G Net exportsX – M –99 equals: Government sector T – G –67 plus Private sectorS – I –32 Relationship among surpluses and deficits

TM 19-7 Copyright © 1998 Addison Wesley Longman, Inc. The Twin Deficits Since there is a tendency for the government sector deficit and the net exports deficit to move in the same direction, they are sometimes referred to as the twin deficits.

TM 19-8 Copyright © 1998 Addison Wesley Longman, Inc. The Twin Deficits