Let C stand for consumption spending, I for investment, G for government purchas

Question

Let C stand for consumption spending, I for investment, G for government purchases, X for exports, IM for imports, DI for disposable income, and NT for net taxes. Consider the following identity and answer the questions that follow. C + I + G + (X - IM) = DI + NT Which of the following best characterizes the above identity? National income must equal domestic product. National income must equal the total amount of leakages from the nation's flow of income and expenditures. Domestic product must exceed national income. Domestic product must equal the total amount of injections into the nation's flow of income and expenditures. True or False: Imports must equal exports. False True

Explanation / Answer

(1) The 1st option is correct.

Domestic product = C + I + G + (X - IM)

National income = DI + NT

So, Domestic product = National income

(2) False

Imports can be less than, equal to of more than exports.

If Imports < (>) Exports, there is a Trade Surplus (Deficit), and if Imports = Exports, the trade balance is zero.

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