Question

Assume that GDP is $6,000, personal disposable income is $5,100, and the government bud

get deficit is $200. Consumption is $3,800, and the trade deficit is $100.

a. How large is saving (S)? b. How large is investment (1)?

c. How large is government spending (G)?

Answer 1

a. The disposable income is either consumed or saved.

$YD=C+S \\ S=YD-C \\ = 5100-3800 \\ = 1300$

The saving is $1300.

b. To calculate the investment, use the relation between saving, investment, government budget and trade.

$S-I = (G+TR-TA)+NX \\ I = (TA-TR-G) -NX +S \\ = -200 -100 +1300 \\ = 1200$

The investment is $1200.

c. To calculate the government spending, use the national income identity.

$Y=C+I+G+NX \\ G= Y-C-I-NX \\ = 6000 -3800- 1200 -(-100) \\ = 1100$

The government spending is $1100.