Question

Consider the economy with C 800, I 300, X 150, and M 250. Also, the primary income balance (net factor income) is 80, and the secondary income balance (net transfers) 120. GNDI is 1,200.

find absorption, saving, and the current account balance:

Answer 1

We are given with C = 800, I = 300, X = 150 and M= 250. Primary income balance is 80 and secondary income balances is 120.

GNDI = C + I + X - M + net factor income + net transfers

GNDI = 800 + 300 + 150 - 250 + 80 + 120 = 1200

Firstly, we need to understand what is primary and secondary income balances.

Primary income balance is part of a nation's current account on the balance of payments. Primary income is the net flow of profits, interest and dividends from investments in other countries and net remittance flows from migrant workers.

Secondary income balance refers to transfers recorded in the balance of payments whenever an economy provides or receives goods, services, income, or financial items.

Absorption is total expemditure on goods and services by domestic residents according to keyensian absorption approach. In this case, we have consumption, investment and imports which give sum equal to 800+300+250 = 1350.

Savings are equal to investments in economy other than that have been consumed.So, savings are 300.

Current account balance(CAB) includes net exports, net factor income and net current transfers.

If the amount is positive, then we have current account surplus otherwise there is deficit in current account balance which is accomodated by capital account.

Current account balance = X-M + Net factor income + net current transfers

CAB = 150 - 250 + 80 + 120 = 100

In our case, we have current account surplus.