Question

We showed in Eq. (2.10) that S=1+CA, where S is national saving, / is investment, and CA is the current account balance. Calculations of national saving and investment depend on the treatment of government investment. In the text, we treated government purchases, G, as if they were consumption expenditures. Therefore, Eq. (2.7) states that government saving is Sgovt=(T−TR−INT)−G, so that (1) national saving in Eq. (2.8) is S=Y+NFP−C−G, and (2) / in Eq. (2.10) is gross private domestic investment GPDI. As mentioned in the text, a more detailed treatment recognizes that government purchases comprise consumption expenditures, which we will call GCE, and government investment, which we will call GI, so G=GCE+GI. Now define government saving as (T−TR−INT) - GCE. With this alternative definition of government saving, show that private saving plus government saving =I+CA, where investment (I) is the sum of GPDI and GI.

Here are recent values for many of the variables that influence our measures of saving and investment, in billions of dollars.
Private Saving + Government Saving 2000
Gross Domestic Investment 2450
Current Account Balance negative 600
Capital Account Transactions 5
Statistical Discrepancy negative 145
Does the identity hold true? That is, does private saving plus government saving =1+CA ? Yes
How can the entries for capital account transactions and statistical discrepancy help to make the identity hold true?
A. Statistical discrepancy + private saving + govemment saving - capital account transactions = gross domestic investment + current account balance.
B. Statistical discrepancy + private saving + government saving - capital account transactions = gross domestic investment - current account balance.
C. Statistical discrepancy + private saving + govemment saving + capital account transactions = gross domestic investment - current account balance.
D. Statistical discrepancy + private saving + govemment saving + capital account transactions = gross domestic investment + current account balance.

Answer 1

The identity holds true. national saving and investment identity states that private saving plus government saving equals investment plus the current account balance. To show that private saving plus government saving equals investment plus the current account balance, we can rearrange the equation as follows: S + (T-G) = I + CA.

Step-by-step explanation:

The national saving and investment identity states that the total quantity of financial capital supplied from all sources must equal the total quantity of financial capital demanded from all sources. In an economy with a current account deficit and a budget deficit, the equation is: S + (M-X) = I + (G-T).

Where S is private saving, M is imports, X is exports, I is investment, G is government spending, and T is taxes. To show that private saving plus government saving equals investment plus the current account balance, we can rearrange the equation as follows: S + (T-G) = I + CA.

Therefore, the identity holds true.