Economics/Accounting Identities http://puu.sh/kBx8Y/7a1988a17d.png The following

Question

Economics/Accounting Identities

http://puu.sh/kBx8Y/7a1988a17d.png

The following data (in $billions) describes a national economy: Calculate the following magnitudes for this economy Private saving Disposable income Total consumption (government plus private) Net exports Suppose you are told that private savings is equal to domestic investment in an open economy. Further, you are told that the government is running a budget deficit. Use your knowledge of the national income accounting identities to explain the implications of these facts for net exports.

Explanation / Answer

a)

i) National savings = Public savings + Private savings

public savings = Govt taxes - govt spending

govt deficit = 1000

govt spending - govt tax= 1000

national savings = 4000

=> 4000 = private savings - 1000

private savings = 5000

ii) Disposable income = personal income - tax

personal income = GDP = 20000

tax= govt consumption - deficit

= 4000-1000

=3000

disposable income = 20000-3000 = 17000

iii)

GDP = C +I + G+ (X-M)

C= private consumption

G= govt consumption

also, disposable income = savings + consumption

=> personal income - taxes = savings + consumption

consumption = personal income - taxes - savings

= 20000 - 3000 - 5000

= 12000

total consumption = private consumption + govt consumption

= 12000 + 4000

=16000

iv)

Y = C +I +G + (X-M)

N-X = Y - C- I - G

= 20000 - 12000 - 2000 - 4000

= 2000

Net exports = 2000

b)

Given savings = investments

i.e. S= I , G - T = deficit >0

from the equation S = I + (G-T) +(X-M)

substitute S=I in the above equation

=> N-X = T-G

It indicates an economy will have net exports which equals the budget surplus

if the economy is experiencing budge deficit, then its imports exceeds exports

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