3. The accompanying table shows the percentage of GDP accounted for by private s

Question

3. The accompanying table shows the percentage of GDP accounted for by private savings, investment spending, and net capital inflow in the economies of Capsland and Marsalia. Capsland is currently experiencing a positive net capital inflow, while Marsalia is experiencing a negative net capital outflow. What is the budget balance (as a percentage of GDP) in both countries? Are Capsland and Marsalia running budget deficits or surpluses?

Capsland's budget balance =

%

Marsalia's budget balance =

%

Capsland Marsalia Investment spending as a
percentage of GDP 20% 20% Private savings as a
percentage of GDP 10 25 Net capital inflow as a
percentage of GDP 5 -2

Explanation / Answer

Investment = Private Savings + Government Savings + Net Capital inflows

I = SP + SG + IM-X

Capsland's budget balance = I - SP – ( IM-X)

=20% - 10% -5%

=5 %

Capsland’s government is running a budget surplus of 5% of GDP.

Marsalia’s budget balance = I - SP – ( IM-X)

=20% - 25% - (-2%)

=-5%+2%

=(-) 3%

Marshalia’s government is running a budget deficit of 3% of GDP.

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