Data and definitions: Underestimating savings and investment in an open economy

This note clarifies definitions and derives from first principles the relationship between investment, domestic and foreign savings. Indian national accounts report and use gross domestic savings but the measure of capital inflows used with it, to derive gross domestic capital formation, is the one appropriate for gross national savings. The latter includes net income from abroad and so does the current account so that income from abroad is netted out in using it together with the current account. But gross domestic savings is not adjusted for net income from abroad so that concept of net inflows used with it must also not include net income from abroad. This concept of net capital inflows is the net imports of goods and services. The underestimation of investment and foreign savings given conceptual macroeconomic definitions and Indian practice is illustrated and implications drawn from the errors.