Which of the following is always correct in an open economy?

Question

a.

S = NCO
b.

S = I + NCO
c.

S = I
d.

S = NX + NCO

Answer 1

In an open economy, the correct relationship is:

b. S = I + NCO

This equation expresses that savings (S) in an open economy is equal to domestic investment (I) plus net capital outflow (NCO). Net capital outflow represents the net flow of funds being invested abroad minus the net flow of foreign investment coming into the country.

• Option a (S = NCO) is not always correct, as savings must also cover domestic investment.
• Option c (S = I) is only true in a closed economy.
• Option d (S = NX + NCO) is incorrect as well since it doesn't hold universally in all economic contexts.

Therefore, option b is the correct answer.