Question

A national income accounting exercise: The gross national product of an open economy could be expressed as following identity equations: Y = C + I + G + (EX – IM) or Y = C + I + G + CA and Y=C+Sp +T where Y = gross national product: C = aggregate consumption; I = aggregate investment; G = government spending; EX = exports; CA = current account IM = imports; Sp = private savings; T = tax; current account or CA = (EX-IM) Explain the status of the current account when: a. (Sp – I) = (G – T). What does it imply? b. (Sp– I) > (G – T). What does it imply? c. (Sp– I) < (G – T). What does it imply?

Answer 1

A national income accounting exercise:

The gross product of an open economy could be express :

Y = C+I+G+(EX-IM)                  equ. 1

Or

Y = C+I+G+CA and equ. 2

Y= C+Sp+T                               equ. 3

Where, Y = Gross national income,

             C = Aggregate consumption,

              I = Aggregate investment,

             G = Government spending,

  EX= Export, IM= Imports,

            CA= Current account,

             Sp= Private saving,

              T = Tax, CA = (EX-IM),

Status of current account :

(a.)Ans. – If (Sp-I)=(G-T) or (Sp+T) =(G+I)        by equ. 1 & 2

               C + I +G + CA =C + Sp +T      => CA = 0    or (EX-IM)=0

That imply export of country is equal to import of country so, country has no deficient (debt) or surplus. That’s indicate balance of payment is approximately zero country fulfil its requirement of income to balance expenditures.

(b.)Ans. – If (Sp-I) > (G-T)        by equ. 1 & 2

               C +I + G + CA = C + Sp + T    =>     CA = (Sp-I) – (G-T) = +ive (Positive)

               EX – IM = +ive

That imply export of country is more than to import of country so, country has no deficient (debt) & create surplus. That’s indicate balance of payment positive so country generate more income than expenditures.

  

(c.)Ans. - If (Sp-I) < (G-T)        by equ. 1 & 2

C +I + G + CA = C + Sp + T    =>     CA = (Sp-I) – (G-T) = -ive (negative)

               EX – IM = -ive

That imply export of country is less than to import of country so, country has create deficient (debt) & not has surplus. That’s indicate balance of payment negative so country has shortage of income to fulfill expenditures.