Question

Suppose output is $35 billion, government purchases are $10 billion, consumption is $15 billion,
and net exports are $8 billion. Assume net factor payments equal 0.
(a) Calculate the equilibrium amount of investment for this economy. Show your work.
(b) Calculate the equilibrium amount of absorption for this economy. Show your work.
(c) Calculate the equilibrium amount of the financial account balance for this economy.
Show your work.
(d) Given the value you found for the financial account balance, do you believe the country
discussed here to have a developed open economy or an emerging and developing open
economy? Justify your answer.

Answer 1

(in Billion $)

Y= 35

G=10

C=15

X-M =8

Net factor payment =0

a)GDP = Consumption + Investment + Government Spending + Net Exports

35=15+I+10+8

35-15-18=I

$2 Billion=I

b) Absorption

It is total amount of spending on goods and services by an economy. Thus, it will include imports and exclude exports.

Absorption =Y= C+I+G+X-M- Net Exports

=35-8

=$ 27 Billion

c) financial account balance

Since the economy has surplus in export that is it has claim over the assets of other countries. The Financial Account Balance is $8 Billion (i.e. Net Exports)

d) As seen from the financial account balance, it has surplus exports making it a developed open economy. Developed economy generally have better exports as it has strong and competitive industies.