Question

The following table contains data for a hypothetical closed economy that uses the dollar as its currency.

Suppose GDP in this country is $1,680 million. Enter the amount for consumption.

National Income Account	Value
	(Millions of dollars)
Government Purchases (GG)	350
Taxes minus Transfer Payments (TT)	420
Consumption (CC)
Investment (II)	455

Complete the following table by using national income accounting identities to calculate national saving. In your calculations, use data from the preceding table.

National Saving (S)National Saving (S)	=  =
	=  =
		million

Complete the following table by using national income accounting identities to calculate private and public saving. In your calculations, use data from the initial table.

Private SavingPrivate Saving	=  =
	=  =	million

Public SavingPublic Saving	=  =
	=  =	million

Based on your calculations, the government is running a budget

Answer 1

1. In a closed economy, Y = CC + II + GG (where, Y = real GDP)

Or, CC = Y - II - GG = $(1680 - 455 - 350) million = $875 million

2. National savings = private savings + public savings = (Y - CC - tax + transfer payment) + (Tax - transfer payment - GG) = Y - CC - GG

And we know that, Y - CC - GG = II

Therefore, national savings = II = $455 million

3. Private savings = Y - CC - tax + transfer payment = Y - CC -(tax - transfer payment) = Y - CC - TT = $(1680 - 875 - 420) million = $385 million

Public savings = TT - GG = $(420 - 350) million = $70 million

The government is definitely running a budget surplus because it is having a positive public savings.