Given the following information about a closed economy, what is the level of investment spending and national saving, and what is the budget balance?

Given the following information about a closed economy, what is the level of investment spending and national saving, and what is the budget balance? There are no government transfers.

GDP: $1,000 million T=$50 million

C=$850 million G=$100 million

Solutions

Expert Solution

GDP= $1000 million

T= $50 million

C= $850 million

G = $100 million

I = Investment= GDP- C-G

I = 1000-850-100

I= $50 milion

Reason - when we calculate GDP by expenditure method GDP is equal to the sum of consumption expenditure, Investment expenditure, and Government spending.

Private Savings= GDP - T- C

Private Savings= 1000 -50 -850

Private Savings= $100 million

Reason- Private savings are the savings of the household. They are calculated by subtracting Taxes and consumption expenditure from the income or GDP.

Government savings or Public savings = T - G

Government savings or Public savings = 50- 100 = -$50 million

Reason- Public Savings are the savings of the government. they are calculated by subtracting the expenditure from the taxes.

Since Government savings is positive its Budget surplus of $50 million.

National Savings= Private savings + Public Savings

National Savings= $100 million - $50 million = $50 million

Reason- National savings is the sum of savings with the government and savings with the private households.

Rahul Sunny answered 1 year ago

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