Question

Country private domestic savings of $650 billion, a government deficit of $200 billion, and private domestic investment of $500 billion. What is the trade surplus / deficit?

Answer 1

Answer

Economy is in equilibrium when Y = AE where AE = C + I + G + NX.

Here Y = Income , AE = Aggregate expenditure, C = Consumption, G = Government Spending, I = Domestic Investments and NX = Net Exports = Exports - imports.

Thus Y = AE => Y + C + I + G + NX

=> I = Y - C - G - NX -------------------(1)

Private Saving = 650 billion and Government deficit = 200 billion. Government deficit = G - T and Government(or Public) Saving= T - G = negative of government deficit = -200 billion (here T = Taxes).

Private saving = Y - C - T and Public saving = T - G

National Saving(NS) = Private saving + Public Saving = 650 billion + (-200 billion) = 450 billion

Thus NS = Y - C - T + (T - G) = Y - C - T and as calculated above NS = 450 billion -----------------------(2)

From (1) and we have I = Y - C - G - NX and from (2) we have NS = Y - C - G

=> I = Y - C - G - NX => I = NS - NX

Here I = 500 billion and NS = National saving = 450 billion

=> 500 billion = 450 billion - NX

=> NX = 450 billion - 500 billion = -50 billion

=> NX = Exports - Imports = -50 billion => NX < 0

=> Imports - Exports = 50 billion.

There will be a trade surplus if NX > 0 and there will be trade deficit if NX < 0. We can see from above that NX < 0 and hence there is a trade deficit.

Value of Trade deficit = Imports - Exports and as calculated above Imports - Exports = 50 billion.

Hence, There will be a Trade deficit = 50 billion.

Hence, There will be a Trade deficit and this trade deficit = $50 billion