Final answer:
It is false that consumption must equal saving in an economy. An economy can have different levels of consumption and savings, which can be analyzed separately. The example provided showcases the national saving and investment identity and how the balance of trade adjusts to changes in government budget balances.
Step-by-step explanation:
For an economy as a whole, it is false that consumption must equal saving. Consumption and savings are related but distinct concepts, and their relationship can be examined by analyzing data on both. However, they do not have to be equal in an economy. For instance, in the given example of an economy with a budget surplus of 1,000, private savings of 4,000, and investment of 5,000, the national saving and investment identity would look like the following:
National Saving (S) = Private Saving (Sprivate) + Budget Surplus (Sgovernment)
S = 4,000 + 1,000
S = 5,000
The national saving matches the investment amount, so the balance of trade in this economy would be zero, indicating that the economy is neither exporting nor importing net financial capital.
If the budget surplus changes to a budget deficit of 1,000, with private saving and investment remaining unchanged, the new balance of trade would need to adjust to maintain the identity. Now the National Saving is lower by the amount of the deficit:
S = 4,000 - 1,000
S = 3,000
This would mean that the economy would have a trade deficit of 2,000 (5,000 - 3,000) to balance out the lessened national saving compared to investment.