Household Consumption 10,726 b. Savings by Households 539 c. Taxes 4,156 d. Gros

Question

Household Consumption 10,726

b. Savings by Households 539

c. Taxes 4,156

d. Gross investment 2,010

e. Government spending on goods/services 3,154

f. Exports 2,843

g. Imports 3,312

h. Gov't Deficit financed by borrowing 1,380

i. Firm Borrowing -372

j. Capital Outflow 396

"One way to measure (among many) the relative size of the government sector in an economy is to divide the total government spending by the GDP. In rounded percentage terms, what is the size of government spending compared to the GDP? (format your answer as rounded percentage, ex: 99%)"

In the previous question you identified an item which is normally positive but in this particular year was negative. Which of the following explanations most likely explains what happened this year?

Question 9 options:

1)

2)

3)

4)

none of the above explanations could explain the data

The value of net exports (you already calculated it) is a negative. This means that the rest of world was paid money (US dollars) for selling goods and services to the U.S.(imports). They used some of that money to buy goods and services from the U.S. (exports). This means the R.O.W. had money left over from selling imports that they didnât use to buy our exports. What did they do with this money?

Question 10 options:

1)

2)

3)

4)

Help with the above would be appreicated.

1)

business firms went on a borrowing spree, running up corporate debts

2)

corporate profits were so large and the need/plan for investment spending so small that firms paid down their debts instead of borrowing new money.

3)

business firms did more investment spending than normal

4)

none of the above explanations could explain the data

Explanation / Answer

GDP = Consumption + Investment + Government Spending + Export - Imports

10,726 + 2,010 + 3,154 + 2,843 - 3,312 = 15421 = GDP

Government Spending is 20.45% of GDP.

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Firm Borrowing are given as -372, which is normally positive but in this particular year was negative. This could be probably due to corporate profits were so large and the need/plan for investment spending so small that firms paid down their debts instead of borrowing new money.

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The net exports are negative, which means that US has spent dollars in Rest of the world more than the amount of dollars people in Rest of the world (ROW) have spent in buyinmg US goods and services. With the excess outflow of USD in ROW, keep it - and thus further enrich themselves at expense of US consumers or used it to buy financial assets (capital assets) in or from the U.S. such as US bonds, stocks, and bank deposits or used it to fund their own consumption activities.

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