Question

Dave?s Mirror Company expects to sell $1,000,000 worth of mirrors and to produce $950,000 worth of mirrors in the coming year. The company purchases $200,000 of new equipment during the year. Sales for the year turn out to be $1,200,000. a) How much is total actual investment by Dave?s Mirror Company? b) How much was total planned investment? c) Explain what implications this has for future employment if Dave is indicative of the larger economy?

Answer 1

Total actual investment includes the money spent on equipment and any unintended inventory changes. Total planned investment is the forecasted spending on equipment. Future employment could improve if the increase in demand shown in Dave's company is reflected in the broader economy. For the budget scenario, national saving equals the sum of both public and private savings. The trade balance would be zero if all savings are used for domestic investment; otherwise, a budget deficit could lead to a trade deficit.

Step-by-step explanation:

Assuming the scenario where Dave's Mirror Company is expected to sell $1,000,000 worth of mirrors and to produce $950,000 worth of mirrors with the purchase of $200,000 of new equipment, the total actual investment for Dave's Mirror Company would be the actual amount spent on new equipment plus the unintended inventory accumulation (if actual sales exceeded expectations).

The total planned investment is the planned spending on new equipment, which in this case is $200,000. If actual sales turned out to be $1,200,000, this would result in unplanned inventory reduction, indicating higher demand than anticipated.

Implications for future employment could be positive if this increase in demand is reflected across the larger economy. Businesses like Dave's would need to adjust production upwards to meet the higher demand, potentially leading to job creation to increase production capacity.

Now to answer the student's question regarding an economy with a budget surplus of 1,000, private savings of 4,000, and investment of 5,000:

1. National saving and investment identity for the economy would be: National Saving (Public + Private) = Investment. In this case, Public Saving (budget surplus) + Private Saving = Investment; 1,000 + 4,000 = 5,000.
2. The balance of trade, given this identity, would be zero since all savings (public + private) are used for domestic investment.
3. If the budget surplus changes to a deficit of 1,000 (meaning Public Saving becomes -1,000), then National Saving would be 3,000. As the investment remains at 5,000, the balance of trade will be negative, implying a trade deficit of 2,000.