December 03, 2004

The savings rate and trade balance are flows, and as such, they are part of the economy’s income statement. On the other hand, the net worth is part of the balance sheet. We show that it was a mistake to look at the changes in private savings without paying attention to the change in net worth (i.e. balance sheet). Using the corporate analogy, we must either capitalize the income statement, or else convert the changes in net worth into the income statement. Only then will we have a complete picture of the economy.

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