Final answer:
To reduce the trade deficit by $25 billion, private domestic investment would need to decrease by $225 billion, when keeping other factors unchanged such as private domestic savings and the government deficit.
Step-by-step explanation:
Solving Problems with the Saving and Investment Identity
Given an economic scenario where the original trade deficit is $125 billion, and there is a desire to reduce this deficit by $25 billion without changing private domestic savings or the government deficit, we can approach this situation using the national saving and investment identity. The identity is as follows: National Savings (S) + Government Savings (T-G) = Investment (I) + Net Exports (trade balance). In this specific case, the identity simplifies to private domestic savings plus the government deficit equals private domestic investment plus the trade deficit.
To solve for the change in private domestic investment when reducing the trade deficit by $25 billion, we adjust the equation accordingly:
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- Private domestic savings ($410 billion)
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- Government deficit ($100 billion) as negative because it's a deficit
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- New trade deficit original ($125 billion) minus $25 billion reduction.
So, the equation would be: $410 billion - $100 billion = private domestic investment + ($125 billion - $25 billion)
Which simplifies to: $310 billion = private domestic investment + $100 billion
So, the new required investment to achieve this reduced trade deficit would be $210 billion, showing a change of:
$435 billion (original investment) - $210 billion (new investment) = $225 billion decrease in private domestic investment.