The easiest way to show the connection between saving and investing is to accept the thought experiment of a closed economy for a moment (without exports and imports). This is, so to speak, the general case of the global economy, which does not have any foreign trade with other planets.

Loanable funds market | Financial sector | AP Macroeconomics

The demand side of GDP is then:

GDP = consumption (private and government) + investment (private and government).

As you can see, the external contribution has now disappeared here, since there is no other country with which the closed economy does business. At the same time, according to the national accounts distribution chart, GDP is equal to total economic income, which in turn consists of profits and wages. Since the state claims part of the profits and wages through taxes and levies and at the same time pays transfers to private households (e.g. unemployment benefits, child benefits, pensions) and subsidies to private companies, the distribution side of GDP can also be written as follows:

GDP = disposable income (private and public).

The demand side GDP must always be the same as the distribution side GDP. It follows that aggregate income must correspond to private and government spending on consumption and investment. The part of the disposable income that does not flow into consumption must, therefore, be equal to the investment:

disposable income – consumption = investment

Income that is not spent on consumption is also called savings, so that it follows:

savings = investments

We have thus formally derived the formula that is important for macroeconomics: savings = investments. But what exactly does this formula mean? Basically, we usually understand by “saving” that we increase our net worth (assets minus debts). So at the end of the period we are looking at a larger fortune or less debt than at the beginning.