Final answer:
In the given economy, the national saving and investment identity is balanced when the budget surplus and private savings equal the total investment. The balance of trade is zero when savings are equal to investment. When the budget surplus turns into a deficit, the new balance of trade shows a deficit, indicating that the country is borrowing from abroad.
Step-by-step explanation:
National Saving and Investment Identity
In an economy, the national saving and investment identity is an equation that must always balance. It can be expressed as:
National Savings = Investment
For the economy in question, the components of national savings include both the budget surplus and private savings:
National Savings = Budget Surplus + Private Savings
Thus, the national saving and investment identity for this economy would be written as:
1,000 (budget surplus) + 4,000 (private savings) = 5,000 (investment)
Balance of Trade
The balance of trade for an economy is the difference between the value of its exports and imports. When an economy's national savings exceed its investment, it is lending the excess to the rest of the world, which implies a trade surplus.
In this case, since National Savings equals Investment, the balance of trade would be zero, indicating neither a trade surplus nor a deficit.
Changes in the Budget Balance
If the budget surplus becomes a budget deficit, the national savings decrease accordingly.
New National Savings = -1,000 (budget deficit) + 4,000 (private savings) = 3,000
With investment unchanged at 5,000, the economy would now be borrowing 2,000 to meet its investment needs. This implies that the new balance of trade would be a deficit of 2,000 as the country would be importing capital to cover its investment that exceeds its savings.