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Homework answers / question archive / Saving and investment in the national income accounts The following table contains data for a hypothetical closed economy that uses the dollar as its currency
Saving and investment in the national income accounts
The following table contains data for a hypothetical closed economy that uses the dollar as its currency.
Suppose GDP in this country is $900 million. Enter the amount for consumption.
National Income Account
Value
(Millions of dollars)
Government Purchases ( ) 250
Taxes minus Transfer Payments ( ) 325
Consumption ( ) ______
Investment ( ) 275
Complete the following table by using national income accounting identities to calculate national saving. In your calculations, use data from the preceding table.
National Saving(s)
= (Y-T-G/ Y-C-G/ G-T/ Y-C)
= (G/C/Y/I)
$__________million
Complete the following table by using national income accounting identities to calculate private and public saving. In your calculations, use data from the initial table.
Private Saving
=(Y-C-T/ T-G/ C-T/ Y-T-I)
$__________million
Public Saving
= (Y-T-I/ T-G/ C-T/ Y-C-T)
$_________million
Based on your calculations, the government is running a budget (surplus/ deficit) .
Answer
(i)
In a closed Economy Y = C + I + G
Here Y = GDP = 900 million
C = Consumption
I = Investment = 275 million
G = Government purchases = 250 million
=> 900 million = C + 275 million + 250 million
=> C = 375 million
Hence, Consumption = $375 million
(ii)
National Saving = private saving + Public saving
Private saving = Y - C - T
where T = taxes - Transfers
Public Saving = T - G
=> National Saving = private saving + Public saving
= Y - C - T + T - G
= Y - C - G
=> National Saving = 900 million - 375 million - 250 million
= $275 million
(iii)
Private Saving = Y - C - T
= 900 million - 375 million - 325 million
= $200 million
(iv)
Public Saving = T - G
= 325 million - 250 million
= $75 million
(v) Government is running a budget surplus If Public saving is greater than 0/ Here Public saving = 75 million. So, Government is running a budget surplus of 75 million
Hence, Government is running a budget surplus of $75 million
