Question

Suppose that, for a given year, national saving in a country (an open economy) equals 200, private consumption in final goods and services equals 100, and government consumption in final goods and services equals 20. In addition, firms invested 75 in final goods and services and spent 25 in intermediate goods. Households invested 50 in the domestic stock market. What is the level of output in this country in this year? And what is the balance of the current account? (Hint: Make sure you review the definition of gross domestic product.)

Answer 1

Given values,

National Savings, S= 200
Consumption in final goods and services. C= 100
Government Expenditure, G= 20
Firm Investment, I= 75
Firm Expenditure on Intermediate Goods, FE=25
Household Investment in stock market, HI= 50

GDP: It's full form is Gross Domestic Product and is the total number of goods and services produced in a country within a specific time period.
It's mathematical formula is GDP= Consumption (C)+Investment(I)+Government Expenditure(G)+Net Exports(X)

It is to be noted that intermediate goods and investment in domestic stock markets are not included in the mathematical calculation of GDP. This is to avoid a phenomenon called Double Counting. When intermediate goods are used to produce final goods their cost is included in the final price of the final good. So, if we include the price of intermediate goods and then the final goods while calculating GDP, we will be calculating the value twice and thus get an inaccurate value of GDP. Similarly, when a household invests in the stock market, the money invested is used by firms to produce final goods and services. Therefore taking that into account will also lead to double-counting, since the value of the investment will already be added in the price of the Final Good or service.

Keeping the above crieteria in mind let us calculate the GDP,

GDP= C+I+G (Value of X is not given in the question and hence not taken)
=100+75+20=195
GDP=195

Current Account (CA)= Total Savings- Total Investments
Total Investment= 75+50= 125 (Intermediate goods are not included in investments)
Total Savings= 200
CA= 200-125= 75

Therefore
Total Output by the country is= 195
Current Accounts is in Surplus= 75