Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 23: Problem 44

Imagine that the U.S. economy finds itself in the following situation: a government budget deficit of \(\$ 100\) billion, total domestic savings of \(\$ 1,500\) billion, and total domestic physical capital investment of \(\$ 1,600\) billion. According to the national saving and investment identity, what will be the current account balance? What will be the current account balance if investment rises by \$50 billion, while the budget deficit and national savings remain the same?

Short Answer

Expert verified
The current account balance is calculated as follows: National Private Savings = \(1,500 billion - \)100 billion = $1,400 billion Current Account Balance = ($1,400 billion) - $1,600 billion = $-200 billion When investment rises by $50 billion: New Investment = $1,600 billion + 50 billion = $1,650 billion New Current Account Balance = ($1,400 billion) - $1,650 billion = $-250 billion So, the current account balance is $-200 billion, and when investment rises by $50 billion, the new current account balance becomes $-250 billion.

Step by step solution

01

Calculate National Private Savings

First, we need to calculate the national private savings. National Savings is the sum of private savings and government savings. Since we are given the total domestic savings(\$1,500 billion) and government budget deficit(\$100 billion), we can calculate the national private savings by subtracting the deficit from the total domestic savings: National Private Savings = Total Domestic Savings - Government Budget Deficit National Private Savings = \(1,500 billion - \)100 billion
02

Calculate the Current Account Balance

Using the national saving and investment identity, we can now calculate the current account balance: Current Account Balance = National Savings - Investment Current Account Balance = (National Private Savings + Government Savings) - Investment As Government Savings is negative (budget deficit), we can rewrite the equation as: Current Account Balance = National Private Savings - Investment -|Government Budget Deficit| Plug in the values from Step 1: Current Account Balance = (\(1500 billion - \)100 billion) - $1600 billion
03

step 3: Calculate Current Account Balance with Increased Investment

Now we'll calculate the current account balance when investment increases by $ 50 billion while keeping the budget deficit and national savings the same: New Investment = \(1600 billion + \) 50 billion Follow the same formula as earlier: New Current Account Balance = National Private Savings - New Investment - |Government Budget Deficit| Plug in the values: New Current Account Balance = (\(1500 billion - \)100 billion) - $1650 billion Now compute the values in these formulas to get the final answers.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Many think that the size of a trade deficit is due to a lack of competitiveness of domestic sectors, such as autos. Explain why this is not true.

What are the main components of the national savings and investment identity?

Some economists warn that the persistent trade deficits and a negative current account balance that the United States has run will be a problem in the long run. Do you agree or not? Explain your answer.

Using the national savings and investment identity, explain how each of the following changes (ceteris paribus) will increase or decrease the trade balance: a. A lower domestic savings rate b. The government changes from running a budget surplus to running a budget deficit c. The rate of domestic investment surges

In 2001, the United Kingdom's economy exported goods worth \(£ 192\) billion and services worth another E77 billion. It imported goods worth \(£ 225\) billion and services worth \(£ 66\) billion. Receipts of income from abroad were \(£ 140\) billion while income payments going abroad were \(£ 131\) billion. Government transfers from the United Kingdom to the rest of the world were \(£ 23\) billion, while various U.K government agencies received payments of \(£ 16\) billion from the rest of the world. a. Calculate the U.K. merchandise trade deficit for 2001. b. Calculate the current account balance for 2001 . c. Explain how you decided whether payments on foreign investment and government transfers counted on the positive or the negative side of the current account balance for the United Kingdom in 2001.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free