Question

2. Saving and investment in the national income accounts 

The following table contains data for a hypothetical closed economy that uses the dollar as its currency. 

Suppose GDP in this country is $1,680 million. Enter the amount for government purchases. 

Complete the following table by using national income accounting identities to calculate national saving. In your calculations, use data from the preceding table.

 National Saving (S) =  

Complete the following table by using national income accounting identities to calculate private and public saving. In your calculations, use data from the initial table. 

Private Saving = _______ million 

Public Saving = _______  million 

Based on your calculations, the government is running a budget _______ 

Answer 1

As per the information provided in the question

GDP of the country (Y) is =$1680 million

Government Purchase (G) = ?

Tax minus Transfer payments (T) = $360 million

Consumption (C) = $1000 million

Investment (I) = $280 million

In a closed economy the GDP or (Y) = C + I + G

So G = Y – C- I = $1680 - $1000 - $280 = $400 million

Government Purchase (G) =$400 million

National Saving (S) = Y-C-G          (as Y=C+I+G   so Y-C-G = I )                         

National Saving (S) = Investment (I) =$280 million

National Savings (S) =$280 million

Private saving = Y-T-C = $1680 – $360 - $1000 =$320 million

Private saving =$320 million

Public Saving = T-G = $360 -$400 = -$40 million

Public Saving =-$40 million

Since the public saving is negative, it shows that the government expenditure (G) is more than Tax minus Transfer payments (T) therefore the budget run by the government is a Deficit budget