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Chapter 17: Problem 1

In a country, private savings equals \(600,\) the government budget surplus equals \(200,\) and the trade surplus equals100. What is the level of private investment in this economy?

Short Answer

Expert verified
The level of private investment in this economy is $900.

Step by step solution

01

Recall the equation for National Savings

National Savings is the sum of private savings (S), government budget surplus (T-G), and trade surplus (X-M). The equation can be expressed as: National Savings (NS) = S + (T-G) + (X-M) Where: NS = National Savings S = Private Savings T = Tax Revenue G = Government Spending X = Exports M = Imports In this exercise, we are given S, T-G, and X-M directly.
02

Substitute given values into the equation

We know that private savings (S) = \(600, government budget surplus (T-G) = \)200, and trade surplus (X-M) = $100. Substitute these values into the equation: NS = 600 + 200 + 100
03

Calculate National Savings

Now, we can calculate the National Savings: NS = 600 + 200 + 100 NS = 900 So, the National Savings (NS) equals $900.
04

Recall the equation for Private Investment and National Savings

Private Investment (I) is equal to the National Savings (NS) because the money saved in an economy is equal to the investment. Therefore, the equation is: I = NS
05

Calculate Private Investment

Since we have found the National Savings (NS) to be $900, we can now calculate Private Investment (I): I = NS I = 900 The level of private investment in this economy is $900.

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Most popular questions from this chapter

Explain whether or not you agree with the premise of the Ricardian equivalence theory that rational people might reason: "Well, a higher budget deficit (surplus) means that I'm just going to owe more (less) taxes in the future to pay off all that government borrowing, so I'll start saving (spending) now." Why or why not?

Describe how a plan for reducing the government deficit might affect a college student, a young professional, and a middle-income family.

Assume there is no discretionary increase in government spending. Explain how an improving economy will affect the budget balance and, in turn, investment and the trade balance.

Assume that the newly independent government of Tanzania employed you in 1964. Now free from British rule, the Tanzanian parliament has decided that it will spend 10 million shillings on schools, roads, and healthcare for the year. You estimate that the net taxes for the year are eight million shillings. The government will finance the difference by selling 10 -year government bonds at \(12 \%\) interest per year. Parliament must add the interest on outstanding bonds to government expenditure each year. Assume that Parliament places additional taxes to finance this increase in government expenditure so the gap between government spending is always two million. If the school, road, and healthcare budget are unchanged, compute the value of the accumulated debt in 10 years.

Imagine an economy in which Ricardian equivalence holds. This economy has a budget deficit of \(50,\) a trade deficit of \(20,\) private savings of \(130,\) and investment of \(100 .\) If the budget deficit rises to \(70,\) how are the other terms in the national saving and investment identity affected?
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