are no government transfers. (Note: capital inflow = the value of imports (IM) m

Question

are no government transfers. (Note: capital inflow = the value of imports (IM) minus the value of exports (X)). Make sure you show your work in your answers. GDP= $1,000 million G=$100 million X = $100 million IM = $125 million C = $850 million T = $50 million (1) What is the level of investment spending? (2) What is the level of private savings? (3) What is the level of government savings? (4) What is the level of foreign savings? (5) What is the relationship among your answers to (1), (2), (3) and (4) (Verify that the investment-savings identity holds true.

Explanation / Answer

Let me put GDP=Y.

Y= C + I + G + X - IM This is the expenditure approach of calculating GDP.

1). Putting in the values we get,

1000 = 850 + I + 100 + 100 - 125

1000 = 925 - I

I = 75

2). Pvt saving = Y- C ( Because we assume that a person consumes a part of income and saves the rest . And by the equivalence of output and income in the economy at equilibrium, Y = income. So Y = C+ S, where S is pvt saving.)

So S= 1000- 850 = 150

3). Govt savings (GS) = Tax revenues ( T) - Govt expenditure

So GS = 50 - 100 = -50

4). Foreign savings (FS) = exports - imports = negative of capital inflow

FS = 100 - 125 = - 25

5). We know that : I = S  at equilibrium

Here this can be proved because

I = 75 (calculated in ques1)

while total savings = S+ GS+ FS = 150 + (- 50) + ( -25) = 75

So we can see I = S identity holds true .

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