Question

Question 1

1. Distinguish between private saving, public saving, and national saving. ( 3 marks)
2. Explain the impact of an increase in the government budget surplus on private saving, public saving, and national saving.
3. Suppose that in a closed economy the GDP is equal to $11,000, Taxes are equal to $2,500, Consumption equals $7,000, and Government purchases equal $3,000. Calculate private saving, public saving, and national saving?

Answer 1

Answer:

a.

Private savings are the savings done by the households out of their income after paying taxes and doing consumption expenditure. i.e. Private savings=GDP-Consumption-Taxes.

Public savings are the savings done by the government out of the revenues collected as taxes. i.e. Public saving=Taxes-Government expenditure-Transfer payments

National saving is addition of both private saving and the public saving i.e. National saving=Public saving+Private saving.

b.

Increase in government budget surplus means that the government revenue(Taxes) is increased or government expenditure is decreased. It will increase the Public savings.

If increase in government surplus is due to increase in taxes then it will reduce the private savings.

If public savings are increased without affecting private savings then national savings will increase. But if private savings decreased due to increase in public savings then national savings will remain unchanged.

c.

If GDP=$11000; Taxes(T)=$2500; Consumption(C)=$7000 and Government Purchases(G)=$3000

Then

Private saving=GDP-T-C=$11000-2500-7000=$1500

Public savings=T-G=$2500-3000=-$500

National savings=Private savings+Public savings=$1500-$500=$1000.

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