1. In Chapter 2 of our textbook Gordon explains at length that the so-called lea
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Question
1. In Chapter 2 of our textbook Gordon explains at length that the so-called leakages in any economy (over any given time period) must equal injections. In other words, private savings (S) plus public tax revenue (T) must equal private investment (I) plus public government spending (G) plus net exports (NX) Furthermore, he discusses the concept of a country having a positive or negative NX is equivalent to a country being a net foreign investor or a net foreign borrower. This year the Trump administration has implement large cuts in public tax revenue and significantly increased government spending. Explain using the Leakages Injections framework of Gordon the impact Trumps' fiscal policy wiil inevitable have on U.S. net exports and foreign borrowing needs.Explanation / Answer
According to the framework of Gordon Leakages always equal injections.
As presented private savings + tax revenue = private investment + Government spending + export - import
When Trump reduces the taxes then obviously the effect would be on other side as well. In other words the tax revenue serves as source if funds for government expenditure so when tax cuts implemented then government expenditure should also be reduced if other things reamin constant. But here Trump also increases the spending. This implies that the adjustement will made, of the change in tax, not in government expenditure but on foreign investment. For goevrnment spending a source of fund is debt also. When the government has decided to reduce the tax and increae the spending then it must find another source of fund to not only nullify the effect of reduction in tax revenue but also to cover increased government budget. This source would be foreign borrowing. This will make the economy to borrow more from foreign markets/countries. It will reduce the exports and will increase the reliance of foreign borrowiings.
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