Suppose in an economy, household savings equal 4000, firm savings (undistributed profits) equal 800, the government...

Suppose in an economy, household savings equal 4000, firm savings (undistributed profits) equal 800, the government has a deficit of 2500, and investment is 3500.

What must the trade deficit be? What is the savings of the ROW?
Explain how the trade deficit and the government budget deficit are connected (‘twin deficits”). You can refer to the US as an example.

Solutions

Expert Solution

Household savings = 4000, Firm savings = 800. This makes private saving = 4800.

Public saving = -2500

Thus national saving = 4800 - 2500 = 2300

Investment = 3500

1) Note that S - I = NX

Hence NX = 2300 - 3500 = -1200

Trade deficit is 1200

Savings of the ROW = 1200 (which is also the foreign investment)

2) It is explained below

Rahul Sunny answered 1 year ago

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