M is subtracted because C, Id, and G contain imported items and since imports are not produced in the U.S. they should be subtracted out. Y on the left refers to product or supply and the right side of the equation refers to purchases. In equilibrium they match each other. Thus where I f is net foreign investment or the balance on capital account. Twin deficit theory.
Some economists believe that large government deficits led to large current account deficits.
Let us examine this theory by restating the X-M equation. The Twin Deficit theory suggests that since S often is close to I d , when government has a net shortfall in tax collections relative to their expenditures, the left side of the equation is less than zero. This implies the right side of the equation is also less than zero. We were the cause of our own problems. Notice that this is a theory based on the assumption that S and I d are usually equal.