Question

Recall that national savings (S) is the sum of private savings and public savings. S = SP + S a. Show that private savings can be written as a function of investment, the current account and the government's budget deficit. (3 marks) b. Show that the current account can be written as a function of private savings, investment and the government's budget deficit. What does this imply about the ways that the government can reduce the current account deficit? (3 marks) C. In 2019, the U.S imposed trade barriers on Canada, Mexico, and China in an effort to correct for trade imbalances and help improve the U.S current account position. Explain the impact of import tariffs on U.S private savings, domestic investment in capital and the government deficit. (5 marks)

Answer 1

@ S= SP + SG The gorenment saringe is goretement (taxes, I) minus government spending gort spending G). Thus, Sy= T-G-TR Fevenue (transfers to TR & > disposable Savings of the private sector is the income on minus consumption SP = Yd-C where Yd is income, y minus taxes le Yd = Y-T + TR plus tranfers We can rewrite SP as - SP= Y-T+TR-C. Me coeranging According to expenditore method of GDP calculaton, y= C+I+G+ (X-M) -6 Equating & c+I+G+ (X-M) = SP+T+E-TR & -ct It G + (X-M) = S+T-TR - TO

Date It (X-M) = SP +(T-G-TR) . We know that (T-G-TR) is goreonment sanngs. ③ Rearranging 2 + (x-M) + (G-T+TR) = SP where (G-T+TR) is government budget deficit. (X-M) is current account I Loveitmat. this, we have shown private savings as a function of investment, government budget deficit & current acount, If we rearrange we get (X-M) = equation ☺ of poort a SP-I-(G-T+TR) we can see from the above equation that to reduce current account déput, the government should increase o taxes and reduce spending. Pirate sarings must te increased and investront be discowaged. The idea is to reduce aggregate spending in the economy
c. The impact of tariff would depend on the effect of tariif barrier on investment. If the investment is discouraged and private saving can be improved, the current account deficit will fall.

But the effect of trade barrier on these variables may be very low and many other variables work together in the economy and thus,we cannot be sure if there would be a positive impact.