Question

Assume a closed economy, where investment is $10 billion, the government runs a budget surplus of $1 billion, and the government spends $3 billion on various public goods.

a. What is national saving in this economy? National saving is billion.
b. Calculate public saving in this economy. Public saving is billion.
c. Calculate private saving in this economy. Private saving is billion.
d. What is the amount of taxes that government collects?
Government collects billion in taxes.

Answer 1

In the closed economy described, the national saving is $10 billion, computed as the sum of private saving ($9 billion) and public saving ($1 billion), the amount of the budget surplus. The government collects $4 billion in taxes, deduced from the government spending of $3 billion and the budget surplus of $1 billion.

Step-by-step explanation:

National Saving and Investment Identity

In a closed economy, the national saving and investment identity states that total saving (S) must equal total investment (I). Therefore, the national saving is the sum of private saving plus public saving (the budget surplus). Using the provided figures, we can calculate each component:

• 
  
• Public saving = Budget surplus = $1 billion
• 
  
• Investment (I) = $10 billion

With a government spending of $3 billion and a budget surplus of $1 billion, taxes collected (T) must be equal to government spending plus the budget surplus:

• 
  
• T = Government spending + Budget surplus = $3 billion + $1 billion = $4 billion

Since private saving (Sprivate) plus public saving (Spublic) equals national saving (S), and national saving equals investment in a closed economy, we have:

• 
  
• National saving (S) = Private saving + Public saving = Investment
• 
  
• S = Sprivate + Spublic = I
• 
  
• Sprivate = I - Spublic = $10 billion - $1 billion = $9 billion

Therefore:

• 
  
• National saving is $10 billion.
• 
  
• Public saving is $1 billion.
• 
  
• Private saving is $9 billion.
• 
  
• The government collects $4 billion in taxes.